Friday, March 19, 2010

Equities On Track … Initial Divergences in Breadth [ubs capital markets research] $SPX

Equities On Track … Initial Divergences in Breadth

• US Trading: The trading set-up in equities is virtually unchanged to last week. Daily momentum indicators are at
overbought extremes, put/call ratios are strongly declining and intraday momentum is deteriorating, so the upside
seems to be capped on a short-term basis. However, with trending indicators in outright bullish position and a
successful breakout in the banking index, the underlying trend picture remains bullish, meaning any kind of pullback/
consolidation should be short lived

• From a cyclical standpoint, we still see the risk of some minor weakness into next week before the market
resumes its underlying bull trend into April. Our targets on the upside remain unchanged. After a short-term pullback
to 1135/1128 we continue to anticipate a final SPX target between 1200 and 1230.

• US Strategy: Last week we highlighted the still bullish but overbought market breadth. Although the NYSE
Advance/Decline line hit another all-time high last week, we are seeing initial signs of weakening momentum in
market breadth. The number of new 52-week highs at the NYSE is starting to deteriorate and we have a
developing divergence between the semiconductor index and the SPX.
This is the first piece of evidence that
equities are on the verge of a major distribution phase, which however usually lasts several weeks before moving
into its ultimate top.

• European Trading: Last week we saw ongoing sector rotation, with defensive groups retreating whereas
financials and high beta sectors such construction, autos and technology have been extending their bounce
relative to the Euro-Stoxx. The healthy sector rotation is one reason why the market breadth continues to be
strong. On a very short-term basis European headline indices are facing headwind by an overbought situation.
However, a near-term pull-back should be limited in price and time so we stick to our tactical bullish view and
expect more strength into April. Buy autos into weakness!!

UBS Equities Technical Analysis Mar 16 2010

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