Technical Market Outlook

________________________________
Peter Lee – Chief Technical Strategist
Wealth Management Research
August 2010

* Charts courtesy of Reuters Bridge and Bloomberg.

** This report has been prepared by UBS Financial Services Inc.
Major Technical Trends – SPX Index
 Secular Trend (8-20 years) – Sideways Trading Range Trend
March 2009 marked the mid-point of a long-term secular trading range
market. We can expect another 5-10 years of sideways trading before the start
of the next long-term Secular Bull trend in US Equities.

 Primary Trend (1-3 years) – Cyclical Recovery/Cyclical Bull Trend intact

Entering into the midpoint of the March 2009 Cyclical Bull trend. This ensuing
Cyclical Bull rally may sustain until 2011. 2010 price target to 1,220-1,230 has
been achieved. However, 2011 projection to 1,348-1,362 still remains intact.

 Intermediate Trend (3-12 months) – Cyclical Bull consolidation phase

The 17% correction from April 2010 peak to July 2010 low has now set into
motion a sideways trading range market environment. This consolidation helps
to alleviate the overbought conditions (gains of 83% gains) allowing for
resumption of March 2009 Cyclical Bull later in the year.

 Short-term Trend (1 week-3 months) – Nearing an Inflection Point

Another 4-year mid-term Election Year low is likely to develop over the next 1-
3 months. However, SPX is now nearing an inflection point. The outcome of
the battle between the bulls and the bears will help decide next major trend.

1
Psychology of the 2007-2009 Bear Market
 Psychology of a Bear Market coincides with the 5 Stages Grief
Elisabeth Kubler-Ross, MD 1969 book – On Death and Dying

 Stage 1 – Denial – Early 2007 (i.e., HSBC and Barclays Bank were the first
global banks to report sub-prime write downs)

 Stage 2 – Anger – 2nd Quarter to 3rd Quarter 2007 (i.e., 2 Bear Stearns
Hedge Funds collapsed & sharp losses from Goldman Sachs - Quant Fund)

 Stage 3 – Bargaining/Negotiation – End of 2007 to 1st half of 2008 (i.e.,

FED Easing, initiation of the TARP bailout plan)

 Stage 4 – Depression – (i.e., week of Sept 15 2008 – Lehman Brothers

bankruptcy, Merrill Lynch sold to BAC, and AIG bailout) – Institutional
investors capitulated

 Stage 5 – Acceptance (i.e., Jan 2009 to March 2009) – Market Capitulation –

Selling Climax phase – Retail investors also capitulated

 A new Cyclical Bull rally began on March 2010 – Middle of the cycle
If Cyclical Bull is at midpoint then this rally can sustain until 2011

2
SPX Index – Secular Trends -Brave New World report
SPX Index 1900 - Present
10 ,0 0 0
Secular Bear
Trading Range
2000-Present

1,0 0 0
Secular Bear
Trading Range
1966-1982

Secular Bear
10 0 Trading Range Secular Bull
Secular Bear
Trading Range 1929-1949 1982-2000
1906-1921

10 Secular Bull
1949-1965

Secular Bull
1921-1929
1

3
SPX Index – Long-Term Secular Trend Outlook

__ 1942 Uptrend = 645

__1942 Uptrend
1942 = 650
Uptrend = 645
__ 1932 Uptrend = 395
__1932 Uptrend
1932 = 400
Uptrend = 395
The bears favor the 1932
uptrend (green line  400).
We favor the 1942 uptrend (red
line  650). This suggests
another retest of the rising red
uptrend is likely as early as
2012 and possibly at a higher
than March 2009 bottom.

4
Similarities – DJIA 1966 to 1982 and SPX 1997 to Present
1966 - 1982 1997 - Present

Midpoint
= 820-830 Midpoint =
1,120-1,160

8 years to form 8 years to form

left shoulders right shoulders
10 years to form left shoulders

Head and Shoulders Bottom???

16-year Head and Shoulders Bottom Another 5-10 years to form right shoulders?

5
SPX Index – Positive/Negative Outside Month Reversal
Positive Outside Month  Bullish
Negative
Negative Outside Month  Bearish
Outside Months
Monthly Death Cross Sell = Feb/Jul 2007
Negative Outside
April 2001 and July 2008
Months = Jan, Jul, No Positive
and Sep 2000 Negative Outside Months Outside
= Mar 04/Mar 05/May 05 Month on
July 2010

Oct 1999 Negative Outside

Month = Jan 2010
Positive Outside Months
= Oct 04/Jul 05/Jan 06
Monthly Golden Cross
Positive Outside Buy on Jan 2004
Month = Emerging Monthly
Negative Outside Golden
Market Crisis – Oct 98
Month = Jan 2009 Cross on
Positive Outside Positive Outside Month = Jun 2010
Month = Tech/Telecom Real Estate, Credit,
Bubble – Mar 03 Deleveraging and Global
Financial Crisis – Jul 09

6
4-Year Mid-term Election/10-year Decennial Year/Jan
Barometer/Pre-Election Year Cycles Are All Converging
Mid-term SPX Yearly Intra-Year Jan SPX Year Down Jan Jan Close low Market Mid-term DJIA Pre- DJIA Gains
Election Returns Corrections Election low Election Yr Hi low-hi / Year
1953 -6.6% -0.7% -13.9% Bear
1930 -28.5% -44.3% 1956 2.6% -3.6% 0.9% Flat Jul 1914 Dec 1915 89.6% / 87.1%
1934 -4.7% -29.3% Jan 1918 Nov 1919 63.0% / 30.5%
1957 -14.3% -4.2% -12.8% Bear
1938 24.6% -28.9% Jan 1922 Mar 1923 34.1% / -3.3%
1942 12.4% -17.8% 1960 -3.0% -7.1% -6.0% Bear Mar1926 Dec 1927 49.7% / 28.8%
1946 -11.9% -26.7% Dec 1930 Feb 1931 23.4% / -52.7%
1962 -11.8% -3.8% -24.0% Bear
1950 21.7% -14.0% Jul 1934 Nov 1935 73.6% / 38.5%
1954 45.0% -4.4% 1968 7.7% -4.4% -4.9% Cont. Bear Mar 1938 Sep 1939 57.6% / -2.9%
1958 38.1% -4.4% Apr 1942 Jul 1943 56.9% / 13.8%
1969 -11.4% -0.8% -13.4% Bear
1962 -11.8% -26.9% Oct1946 Jul 1947 14.5% / 2.2%
1966 -13.1% -22.2% 1970 0.1% -7.6% -18.6% Cont. Bear Jan 1950 Sep 1951 40.4% / 14.4%
1970 0.1% -25.9% Jan 1954 Dec 1955 74.5% / 20.8%
1973 -17.4% -1.7% -20.6% Bear
1974 -29.7% -37.6% Feb 1958 Dec 1959 55.5% / 16.4%
1978 1.1% -13.6% 1974 -29.7% -1.0% -35.5% Bear Jun 1962 Dec 1963 43.2% / 17.0%
1982 14.8% -16.6% Oct 1966 Sep 1967 26.7% / 15.2%
1977 -11.5% -5.1% -11.1% Bear
1986 14.6% -9.4% May 1970 Apr 1971 50.6% / 6.1%
1990 -6.6% -19.9% 1978 1.1% -6.2% -2.6% Cont. Bear Dec 1974 Jul 1975 52.7% / 38.3%
1994 -1.5% -8.9% Feb 1978 Oct 1979 21.0% / 4.2%
1981 -9.7% -4.6% -13.0% Bear
1998 26.7% -19.3% Aug 1982 Nov 1983 65.7% / 20.3%
2002 -23.4% -33.8% 1982 14.8% -1.8% -14.9% Cont. Bear Jan 1986 Aug 1987 81.2% / 2.3%
2006 13.6% -7.7% Oct 1990 Dec 1991 34.0% / 20.3%
1984 1.4% -0.9% -9.5% Flat
2010 ??? ??? Apr 1994 Dec 1995 45.2%/ 33.5%
Avg. (20) 4.1%(ex div) -20.6% 1990 -6.6% -6.9% -10.2% Bear Aug 1998 Dec 1999 52.5% / 25.2%
1930-2009 7.13%(ex div) -21.89% Oct 2002 Dec 2003 43.5% / 25.3%
1992 4.5% -2.0% -3.5% Flat
Jan 2006 Oct 2007 1.26% / 6.43%
Decennial SPX Yearly Intra-Year 2000 -10.1% -5.1% -9.3% Bear ??? 2010 ??? 2011 ???
Year (0) Returns Corrections
2002 -23.4% -1.6% -31.3% Bear
1930 -28.5% -44.3% Avg. (24)
1940 -15.1% -29.6% 2003 26.4% -2.7% -6.4% Cont. Bear May Sep(15.5 mo) 47.8% / 15.1%
1950 21.7% -14.0%
2005 3.0% -2.5% -3.7% Flat
1960 -3.0% -11.5%
1970 0.1% -25.9% 2008 -38.5% -6.1% -46.3% Bear
1980 25.8% -17.1%
2009 23.46% -9.4% -28.6% Cont. Bear
1990 -6.6% -19.9%
2000 -10.1% -17.2% 2010 ??? -3.7% ??? ???
2010 ??? ???
Avg(24) -4.7% -3.9% -14.7%
Avg. (8) -2.0% -22.4%
24 Down Januarys  13 SPX down Yrs and 10 up Yrs
7
3 Possible Scenarios for SPX during the 2nd half of 2010
 Scenario 1 = Trading range between 1,010-1,040 and 1,131-1,150
Probability = 40% (increases to 50+% on failed breakout)
This Neutral call is the street consensus view. Investors lack the conviction to commit
aggressively to marketplace (i.e., either net long or net short) creating a choppy trading
range market. Increases to 50+% on repeated attempts to breakout above 1,131-1,150.
 Scenario 2 = Correction resumes leading to a marginal new low (950)
Probability = 30% (increases to 40% on confirmed breakdown)
This defensive call is based primarily on the fear of tail risk. Bearish camp points to the
unresolved sovereign debt problem in Greece, repeat of May 6th flash crash, China
slowdown, double dip recession, and geopolitical events around the world. Probability
increases to 40% on confirmed breakdown below key support at 1,010-1,140.
 Scenario 3 = Market melts-up to marginal new highs (1,220-1,1250)
Probability = 30% (increases to 40% on breakout & falls to 20% on breakdown)
This is the contrarian view on the Street. Breakout above key supply at 1,131-1,150
increases the probability to 40% as sideline money and shorts are forced back into
marketplace. This breakout also negates a large 10-month head/shoulders top, confirms
a 4-month head/shoulders bottom, and validates the July 1st low of 1,010.91 as a Mid-
term Election Year bottom. Projections  1,220-1,250 (2010) and 1,348-1,362 (2011)

8
SPX Index – Longer Term Outlook (1+ year)
March 2009 Cyclical Bull rally remains intact.
However, consolidation is still necessary.
2011 target?  1,348-1,362
76.4% = 1,361.50

2010 target  1,220-1,230

61.8% = 1,228.74

50% = 1,121.44 2009 target  1,121

38.2% = 1,014.14 Nov 2008 high = 1,007.51

Jan-Jul 2009 high = 944-956

Mar 09 low = 666.79

10-month ma = 1,108 Jul 09 low = 869.32
30-month ma =1,071 Nov 09 low = 1,029.38
Feb 10 low = 1,044.50
July 10 low = 1,010.91

Although SPX has rallied 82.94% from Mar 2009 low achieving our 2010 target of 1,220-1,230 during Apr 2010, we still believe there remains unfinished business to
the upside. Based on the Aug 2009 neckline breakout above 1,007.51 as well as the 76.4% retracement from 2007-2009 decline this would imply upside technical
targets to 1,348-1,362 possibly as early as 2011. If we are remotely correct with this forecast SPX is now headed towards the mid-point of its Mar 2009 cyclical bull
rally. The Apr to Jul 2010 correction (-17.13%) may be a healthy consolidation phase that is necessary to the resumption of the cyclical bull later in the year.
Nonetheless, we expect volatility to remain high into Mid-term Elections in Nov 2010. Key initial support now moves up to 1,040-1,060 or the Feb/May/early-
Jun/Mid-Jul 2010 bottoms. 1,008-1,011 or Nov 2008 Election Day high, 38.2% retracement from 2009-2010 rally and Jul 2010 low represents key secondary support.
The Jul 2009 head/shoulders breakout at 943-956 continues to offer pivotal intermediate-term support corresponding to the prior July 2009 neckline breakout, 50%
retracement from 2009-2010 rally, and extension of 2007 downtrend. On the upside, near-term supply is at 1,031-1,050 coinciding with the Jan/Jun 2010 highs.
Above this supply renders a retest of 1,173.57 or May 13th high and then to 1,220-1,230 or Apr 2010 reaction high and 61.8% retracement from 2007-2009 decline.
9
SPX Index – Intermediate-term Outlook (3-12 months)
April high = 1,219.80 April 26/June 21
= Negative
Rising Wedge Jan high = 1,150.45 Outside Weeks

Formation?

Feb/May lows = 1,040.78-1,044.50 July 19 =

Positive
Nov 2008 high = 1,007.51 July 1st low = 1,010.91 Outside
Week

July 09 neckline breakout = 944-956

July 09 low = 869.32 Mar 2009-Apr 2010

Retracements
38.2% = 1,008.55
10-week ma = 1,089
50% = 943.29
30-week ma = 1,116
61.8% = 878.04
76.4% = 797.30
Mar 09 low = 666.79

A negative outside week pattern during the week of April 26th coupled with violation a rising wedge pattern during May 2010 flash crash confirmed an
intermediate-term top. This breakdown quickly led to a sharp decline as SPX fell to 1,010.91 or within striking distance of its key support associated with 1,008-
1,009 or the 38.2% retracement from Mar 2009 to Apr 201 rally or 1,008.55 and Nov 2008 Election Day high at 1,007.41. The ability to find support here is
constructive as this signals the start of a consolidation phase. The July 19th positive outside week pattern helps to reinforce this backing and filling process.
Nonetheless, still needs to convincingly breakout above crucial supply at 1,131-1,150 corresponding to the top of its June 21st negative outside week, Jan 2010 high,
and 150-day/200-day/30-week moving average to confirm a major bottom and the resumption of Mar 2009 cyclical bull rally.

10
SPX Index – Shorter-term Outlook (1-3 months)
10-month Head/Shoulders Top? Head = 1,219.80 Right Shoulders =
1,174/1,131/1,129
Left Shoulder or Jan 19 150-day ma
30-day ma = 1,087 high = 1,150.45
50-day ma = 1,088
150-day ma= 1,122
200-day ma = 1,116

Feb/May/Jun/mid-Jul lows = 1,045/1,041/1,042/1,057

Neckline support = 1,010-1,040

Oct 2 low = 1,019.95
Nov 2 low = 1,029.38 Breakdown confirms Head/Shoulders top and
suggests decline of 200 points  820-840

Key support levels  1,080-1,100, 1,040-1,060, 1,007-1,011, 944-956, 869-878

Key resistance levels 1,131-1,150, 1,174, 1,220-1,230, 1,250, 1,348-1,362

A 10-month head and shoulders top pattern and the rolling (trending down) of key moving averages warns of a potential top. Although oversold rallies are
possible, we believe SPX is still vulnerable for volatile swings over the next 1-3 months. Repeated failures to clear above 150-day ma as well as the left/right
shoulders at 1,131-1,150 solidifies the 10-month head/shoulders top formation. Initial support moves up to 1,085-1,107 and then to 1,040-1,057 or the prior
Feb/May/early-Jun/mid-Jul 2010 bottoms. Violation here sets into motion a retest of July lows at 1,010.91 or neckline support. Below Jul bottom confirms head and
shoulders top and renders downside targets to 944-956 and then to 869-878 or the July 2009 low, 61.8% retracement from 2009-2010 rally as well as the measured
technical projection based on 10-month head/shoulders top breakdown. Key supply remains at 1,131-1,150, 1,174 and then 1,220-1,250.

11
SPX Index – Trading Outlook (1-4 weeks)
4/26 high= 1,219.80
4-month Head and Shoulders Bottom?
5/3 high = 1,205.13 5/6-5/13 rally = 10.11%
5/13-5/25 decline = -11.31%
6/6-6/21 rally = 8.54%
5/13 high =1,173.57
76.4% = 1,170.50 6/21-7/1 decline = -10.63%
7/1-8/4 rally = 11.66%

61.8% = 1,140.00 6/21 high =1,131.23 8/9 high = 1,129.24

50% = 1,115.35 5/27 high= 1,103.52

38.2% = 1,090.71
7/30 low =
1,088. 01
5/6 low = 1,065.79
7/20 low = 1,056.88

5/25 low = 1,040.78 6/8 low = 1,042.17

7/1 low = 1,010.91

Apr 2010 downtrend breakout during mid-Jul 2010 signals the start of a sustainable recovery. In fact, this reversal occurred near the 38.2% retracement from Apr-Jul
correction. The next challenge is for SPX to clear above formidable supply near 1,131-1,150 or the Jan/Jun/Aug highs as well as the pivotal 61.8% retracement from
Apr-Jul decline. This crucial supply also represents neckline supply to a potential 4-month head/shoulders bottom pattern. Breakout here confirms head/shoulders
breakout and renders next target to 1,173.56 or May 13th high and then to 1,219.80 or Apr 26th high. The 4-month technical base of nearly 120.32 points suggests
projection to as high as 1,251.55. On the downside, repeated failures to breakout above 1,131-1,150 coupled with violation of trading support near 1,088-1,107
may trigger another consolidation phase to establish a firmer right shoulder near 1,041-1,057 and another attempt to breakout into the fall timeframe.

12
SPX Index – Intra-day Trading Outlook (next few days)
Rising Wedge Pattern? 8/09 high =1,129.24 1,140-1,150

7/27 high = 1,120.95

7/13 high =1,099.46

8/02 upside gap =
23.6% = 1,101.31 1,106.44-1,107.53
8/09 low = 1,111.58
8/06 low = 1,107.17
38.2% = 1,084.04

7/30 low = 1,088. 01

50% = 1,070.08
10-week/50-day
61.8% = 1,056.11 ma = 1,089/1,088
7/20 low = 1,056.88

76.4% = 1,038.84

7/5 low = 1,022.58

7/1 low = 1,010.91

Although the Jul 1st rally has been strong (11.71%) and fast (1- month) a rising wedge pattern warns of a potential near-term top. The top of this wedge pattern is
at 1,145-1,150 and the bottom of pattern is just north of 1,110. Aug 2nd upside gap at 1,106-1,108 as well as the Aug 6th low a t 1,107 and 23.6% retracement
(1,101) from Jul rally and Jul uptrend provide trading support. Violation here confirms a rising wedge pattern and signals the start of a correction possibly to key
secondary support at 1,084-1,089 corresponding to 38.2% retracement from Jul rally, 10-week/50-day ma, and the Jul 30th bottom. If the selling continues SPX may
fall to crucial intermediate-term support at 1,056-1,070 coinciding with the 50.2%-61.8% retracement and Jul 20th low. Violation here opens the door for a deeper
correction back to major support near Feb/May/early-June/mid-Jul 2010 lows and Jul 1st low at 1,011-1,040. Initial supply is at 1,129-1,131 and then 1,145-1,150.

13
US Dollar Index – Monthly Secular Long-term Trend
Long-term Head and Shoulders Top
remains intact. USD is locked in a trading Head = 120-121
range between mid-70s and high-80s
Left Shoulders

Breakout above
89.5-92.5
Right Shoulders

10-month ma = 81
30-month ma = 80

Breakdown
below 71-74

14
US Dollar Index – Retracement Study - Intermediate
Mar 2009 high = 89.71 June 2010 high = 88.80
Double Top or a Head
and Shoulders Bottom?
76.4% = 86.05
61.8% = 83.79
50% = 81.96

61.8% = 79.78
61.8% = 102.10 76.4% = 77.65

Mar 2009 high = 74.21

50% = 96.17

38.2% = 90.24
Breakouts

23.6% = 82.91

Dec 04 low = 80.48

Breakdown

Failure of US Dollar Index to surpass key supply at 89-90 or the 2003 downtrend (89), the 38.2% retracement from 2001-2008 decline (90.24), Nov 2008 high (89.25)
and Mar 2009 high (89.71) have led to a sharp correction. This correction is now approaching pivotal support at 79.78-80.48 or 10-mo/30-mo ma, 61.8%
retracement from Nov 2009 to Jun 2010 rally, and the major lows from early 1990s to mid-1990s and 2004-2005. A successful test will help to establish a 2-year
head/shoulders bottom signaling a rally back to initial supply at 82.5-83.5 or the 10-wk/30-wk ma and 23.6%-38.2% retracement from Jun 2010 decline. Secondary
supply is at 84.5-85.5 and then to 88.80-89.71 or Mar 2009 and Jun 2010 highs. May 2004/Nov 2005 highs at 92.50/92.53 remains major investment supply. On the
downside, violation of crucial support at 79.78 reaffirms a 2-year double top pattern opening the door for a decline to 76.74-77.65 or the Jan 2010 bottom, 76.4%
retracement and 2008 uptrend. Investment support is available near 2008/2009 lows at 74.21-74.31 and then 71.05-71.21.

15
EURO/USD – Intermediate-term Outlook
Complex Head and
61.8% = 1.39 Shoulders Top?
50% = 1.35
38.2% = 1.31
Breakout
50% = 81.96

31.8% = 1.31

50% = 1.21

61.8% = 1.12

76.4% = 1.01

The strong selling from late last year may have temporarily subsided as EURUSD has found key support near its 2004/2005 bottoms at 1.1643-1.1764. The ability to
find support and rally from its June low of 1.1888 as well as breaking out above 1.27 or the Nov 2009 downtrend as well as the 23.6% retracement from Nov 2009-
Jun 2010 decline are encouraging. This rally has now surpassed hovering near formidable supply starting at 1.31 or the 38.2% retracement and as high as 1.34-1.35
or the 10-month ma and 50% retracement from Nov 2009 decline. Major intermediate-term supply remains at 1.37-1.39 or 1995/2004 highs, 61.8% retracement and
left/right shoulders of a potential head/shoulders top pattern. On the downside, initial support to 1.29 and then secondary support is at 1.25-1.27. Further key
support is available near May 2010 and late-Jun lows at 1.2147-1.2154. June 2010 bottom at 1.1888 remains a crucial reaction low. A breakdown here opens the
door to retest 61.8% retracement from 2000-2008 rally (1.12), longer term. 2000/2001 uptrend and 76.4% retracement at 1.00-1.01 is investment-term support.

16
Commodities – CRB Index Retracement Study
Testing key supply zone at 281-286/294

50% = 247
1st Support = 247
61.8% = 236

2nd Support = 230-236

76.4% = 222
Feb low = 229.93
Jul low = 227.58

10-week ma = 265
30-week ma = 267

17
COMEX Gold – Intermediate-term Outlook
2-year Head and Shoulders Bottom and 6-month
basing pattern breakouts suggest higher prices
Breakout above 1,140-1,150  1,210-1,220, 1,255-1,267/1,350
Key support = 1,155-1,165/1,125/1,075-1,085/1,030-1,045

Right Shoulders = 865/905

Left Shoulders = 838-860 10-week ma = 1,212

30-week ma = 1,164

Head = 681 (Oct 2008)

The 2-year head/shoulders bottom breakout last year still suggests upside to 1,325-1,350 over the intermediate-term horizon. However, if Gold enters into a
parabolic move similar in scope to the Aug 1976 to Jan 1980 speculative rally (101 to 873 or 764% gains or x 8.64 move) this precious metal can extend upwards to
as high as 1,950-2,205, at least from a longer-term secular basis (projection based on Feb 2001 low of 255.10). On a near-term basis, however, the breakout above
1,150 has met our shorter-term projection at 1,255-1,265 prompting the most recent correction. Recent decline appears to have held onto key support near 1,145-
1,165 or 30-wk ma, Apr 2010 breakout and 2009 uptrend. 1,025-1,050 or the late-Oct 09/Feb 2010 bottoms offers secondary support. Key intermediate-term
support moves up to 970-1,008 or the extension of 2009 breakout and early-2009 high. To resume uptrend, Gold needs to clear above 1,210-1,220 and then 1,267.

18
Crude Oil – Light Sweet
Head and Shoulders Top formation or
Key supply at 84-87
sideways trading range trend?

Key neckline support at 66.5-68.5

10-week ma = 77
30-week ma = 78

Crude Oil suffered a sharp -22.95% decline during Apr-May 2010 falling below the bottom of its 2009 uptrend channel at 75-76. This breakdown was followed by
the rolling of the 10-wk ma (77) and 30-wk ma (78) during June 14th. A death cross sell signal coupled with two negative outside weeks (during the May 3rd and
June 28th) pressured Crude Oil to pivotal intermediate-term support at 66.5-68.5 or the 38.2% retracement from 2009-2010 rally and the Dec 2009 and the Feb/May
2010 bottoms. Failure to find support here would have triggered a deeper correction to 58-60 or the 50% retracement and the Jul 2009 low and possibly to the
61.8% retracement level and May 2009 breakout at 53-55 under extreme selling. Fortunately, Crude Oil has managed to hold onto support at 66.5-68.5 prompting
a strong recovery. The ability to breakout above prior breakdown and 10-mo/30-mo ma near the mid-70s to 80 is encouraging. However, strong intermediate-term
supply remains near 82-84 or the late-2009/early 2010 highs and then May 2010 high at 87.10. Breakout here negates head and shoulders top pattern.

19
Fixed Income – US 10-Year Treasury Yields – Secular
28-year Secular downtrend in US Treasury Yields remains
intact. TNX has slipped below the mid-point of its band or
below its long-term equilibrium level suggesting lower rates.
Top of Band = 4.49%
Middle of Band = 3.13%
Bottom of Band = 1.76%
Inflationary

Overbought

Equilibrium

Shorter-term range = 2.45%-3.1%

Intermediate-term range = 2.04%-3.5%
Longer-term range = 1.75%-4.0% 10-month ma = 3.37%
30-month ma = 3.39%

Oversold
Deflationary

20
Fixed Income – US 10-Year Treasury - Intermediate
Major support at 2.79%

50% = 3.03%

61.8% = 2.79%
Breakout above 3.1%  3.2%, 3.4-3.6%, 4.0%, and 4.3%

76.4% = 2.50%

Breakdown below 2.79%  2.45%, 2.20-2.25%, and 2.04%

10-week ma = 3.00%
30-week ma = 3.41%

Failure to breakout above 4.0% on Apr 2010 suggests a potential double top and opens the door for a strong pullback. This downturn accelerated as TNX confirmed
its double top pattern as it also broke the 50% retracement from 2008-2010 rally at 3.03%-3.1%. TNX has now quickly decline to its 61.8% retracement at 2.79%
and failure to find support here will likely trigger another downturn to next key support at 2.46%-2.50% or the 76.4% retracement as well as Mar 2009 bottom.
Based on the double top breakdown, we can expect TNX to fall as low as 2.04%-2.2% or to the Dec 2008 bottom and measured projection based on double top
breakdown. To stabilize the downturn TNX needs to surge above 3.0%-3.1%. Intermediate term supply remains at 3.4%-3.6% or the 30-wk, 10-mo and 30-mo ma.

21
S&P 500 Sectors – Current Market Capitalization

Technology remains the largest and most influential sector by market cap
weighing (18.6%). Consumer Staples, Energy, Financials, Healthcare, and
Industrials collectively represent another 60.9% of SPX.
For the March 2009 cyclical bull rally to sustain further many of the larger
market-cap weighted S&P sectors especially Technology and Financials
(35% of total market cap) need to participate to the upside.

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S&P 500 Sectors – Rotation from Oct 2002 – Oct 2007
Commodities based sectors including Materials and
economically sensitive sectors such as Industrials
and Capital Goods led during the last cyclical bull
rally (2002-2007). Technology also outperformed
during the latter part of the last cyclical bull rally. Materials

Leaders
Technology
Industrials

Consumer Discretionary

Laggards Financials

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S&P 500 Sectors – Rotation from Oct 2002 – Oct 2007
During the prior cyclical bull rally leadership were also
concentrated within natural resource intensive sectors
including Energy and Infrastructure such as Utilities.
Laggards comprised of many of the defensive sectors
including Consumer Staples and Healthcare.
Energy
Leaders

Utilities

Communications

Consumer Staples
Laggards Healthcare

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S&P 500 Sectors – Rotation from March 6, 2009 low
From the March 2009 bottom, pro-cyclical sectors and
Financials have led. However, Financials sector has
entered to a sideways trading range since last summer.
Cyclical sectors including Consumer Discretionary and
Industrials continue to outperform but is slowing in recent
months. Two cyclical sectors, Materials and Technology,
have also slowed since the beginning of the year.

Financials

Industrials

Consumer Discretionary
Materials

Technology

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S&P 500 Sectors – Rotation from March 6, 2009 low

Consumer Staples

Utilities
Healthcare
Energy

Communications

When defensive sectors such as Utilities, Healthcare, and

Consumer Staples begin to outperform peers this suggests
the start of a correction or maturing of cyclical bull rally.

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S&P 500 Sectors – Rotation from April 26, 2010 high
Materials

Industrials
Technology

Consumer Discretionary

Financials
Since April 2010 peak, many of the pro-cyclical sectors
have traded in line or under performed SPX Index. This
suggests a deeper and more extensive correction but
not necessarily the start of a major bear. If this
continues this would support a trading range scenario.

27
S&P 500 Sectors – Rotation from April 26, 2010 high
Defensive sectors have begun to outperform peers. This
warns of risk aversion. If this trend persists and cyclical
sectors begin to dramatically underperform defensive
sectors then this would lead to risk reduction.

Communications

Utilities

Consumer Staples

Healthcare

Energy

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S&P 500 Sectors – Rotation from July 1, 2010 low
Basic Materials have outperformed based primarily on the
backdrop of recent recovery in Emerging Markets and
commodity prices. Utilities sector is also strong as an
alternative income play to declining US interest rates.
Materials

Utilities

Industrials

Consumer Staples

Energy

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S&P 500 Sectors – Rotation from July 1, 2010 low
It is interesting to note the mixed technical picture or
dispersion taking place within the defensive sectors. For
instance, Utilities and Telecom are outperforming the
market and the traditional defensive sectors such asEnergy
Consumer Staples and Healthcare are underperforming.
Communications

Utilities

Consumer Staples

Healthcare

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SPX versus MSCI Emerging Market Index
Monthly Relative Strength study shows MSCI
Emerging Markets Index is now breaking out above
key supply. Despite recent market uncertainties, it
appears global investors continue to favor emerging
equities over developed US equities.

Above 77-78  Emerging Markets Outperforms SPX

80

Below 51-52  Emerging Markets Underperforms SPX

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SPX versus Emerging/Developing Countries
Monthly Relative Strength study of SPX Index against
various key Emerging/Developing Equity Markets suggest
China is not in a bubble/speculative phase as some
believe. Rather, China has lagged its Emerging Market
counterparts including Russia, Brazil and India.Russia = 2,542

Brazil
Brazil == 939

India = 643
EM = 356

China = 214
EAFE = 117
Japan = 69

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US Mega Cap Stock Outperformance – Nifty-Fifty II
MS Multinational Index (NFT) or US Mega Cap stocks shows
a large multi-year symmetrical triangle pattern alerting us
the potential for a potential change in long-term
leadership. Is a new Nifty-Fifty II market emerging?

Breakout

111

Breakdown

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Mid-Cap Stock Outperformance
S&P Mid-cap 400 Index (MID) or Mid Cap stocks has
consistently outperformed S&P 500 Index or Large Cap
stocks since 1999 as evident by relative performance
over the past 10-15 years. It appears that his long-term
trend can continue for many more years to come. 179

MID outperforms SPX

MID underperforms SPX

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SPX Dividend Yields
SPX Yields has begun to rise once again. Will
income securities outperform in the years ahead?

SPX Yields
rising again?
SPX Yields rising
SPX Yields declining

1.83%

Yields will likely play an

Since 1970s 43% of SPX influential role in a secular
total returns came from trading range market.
Dividend Yields.

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Contact Information
Peter Lee
UBS Financial Services Inc.
peter.lee@ubs.com
212-713-8888 Ext 01

UBS Financial Services

Wealth Management Research
NY, NY 10019
www.ubs.com

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