UBS: FRIDAY WAS A CAPITULATION BOTTOM
UBS is in stark disagreement with Jeff Saut at Raymond James, who wrote earlier this week, that we are in the middle range of a selling stampede that could last another week or longer. UBS is telling their clients that the markets are near their bottom:
“As highlighted in our Technical Alert on Friday, last week’s sell-off had all the signs of a classic capitulation. We saw a big jump in risk aversion with a spike in the VIX index, the highest volume in SPY since the March lows, a strongly increasing put/call ratio, and a spike in the NYSE TRIN/ARMS index.
Have we seen the lows? We don’t think so, from a cyclical perspective it is too early to call a bottom, and from a price perspective most charts still have some room to test their next relevant support levels.”
Based on this, they think it is time to start getting back in to the water. The risk/reward now favors buying on the dips as opposed to selling the rallies.
“According to our cyclical roadmap, we still favor a 4-month cycle low in late February; so over the next 3 weeks we see equities as still vulnerable for more down tests. However, with last week’s capitulation we think we have seen 90% of the downside, so the next 2 to 3 weeks could be more of a bottoming process (including a bounce this week), instead of expecting more of the same aggressive bear attacks from last week. From a price perspective we stick to our recent call and see most markets pulling back to their 200-day moving averages. Our SPX target is unchanged at 1040 to 1020, the Nasdaq Composite should see a low at around 2050. Given last week’s capitulation we are changing our tactical bias and recommend aggressive traders to start buying/ accumulating into further weakness to position for a significant rally into March/April.”
Source: UBS/TheBack9
A technical bounce well timed with the Grecian bailout for certain.
nobody capitulated at all… I don’t even know one person who sold…
The final push down had the characteristics one expects to find at a selling extreme – a tradable bounce usually shows up within a couple of sessions. Note the following chart where a/d ratio gets to minimum extremes (circled):
NYSE + Nasdaq Combined
Based on that attempt to put in a tradable bottom last week I closed out gold sector shorts I’d been nursing for a couple of weeks. Since then have mostly remained in cash except for building yesterday and today a natural gas short position (sell the weather news, also keen to avoid anything that moves with or against the dollar and NG seems the least correlated at present).
Today marks the first follow up day where we’ve seen an extremely high ratio of advancers to decliners – over 4:1 all day. This is, in an uptrend, typical of a “launch” day which would normally be followed by up and up and up.
The market isn’t in an uptrend at this present, even if the major indexes do not present what I would consider to be a classical reversal question. However key sectors have rolled over and are trading below their uppermost trading range – what was once trending up, then sideways, is now poised to trend down or in the case of some sectors (financials for example, cement, others) has already printed lower swing lows and highs.
Given that situation, it is probably more useful to regard today and any further up days not accompanied by increasing advancer momentum, as a selling opportunity than a buying opportunity.
Maybe the EU folks will save the world, for at least the next week, but there is more to this than Greece so ultimately I expect to see a deeper correction than we’ve seen so far based on the macro backdrop.
Intraday that same adv/dec of issues and volume picture deteriorated meaningfully mid-day, then improved as rumours of the EU re-circled, and has since weakened but remained elevated even as those rumours have been brushed aside somewhat. Clearly the right sort of statement out of the EU could give markets a pop but I wonder if anything they could say will be a sell the news event now. After climbing far more than one percent off the lows in under an hour, the EURUSD cross sold off half a percent in just a couple of minutes, probably as the EU support rumour deflated.
The huge intraday currency swings are not, in my mind, a sign that markets are ready for stability or appreciation anytime soon.
Possibly both UBS and Raymond James will be correct on this one.