UBS technical analysts are with her – sorta…. Republican Presidential aspirant Donald Trump is gaining in the polls, the oil market continues to fall and a September top has been put in place in the S&P 500, technical analysis from the UBS sales trading desk says.
UBS technical analysts – 8% to 10% stock market correction possible
The US stock market was down fractionally Wednesday, bumping up against the lows of the week hit after last Friday’s sell-off. But this is just the start, says technical analysis from UBS’s Michael Riesner and Marc Muller.
The pair now thinks an 8% to 10% correction is possible moving into October and early November, right into the teeth of a historic populist Presidential election.
“It is interesting that in both the normal presidential election year and the eight year of the presidential turn the month of September marks an important tactical top as the basis for a correction into late October/early November, which fits the seasonal cycle in the VIX and most importantly, it fits the macro set up and the technical picture we see on the sector front,” they wrote.
Key support in the SPX is at 2134 and if that breaks 2100, a September 13 report from the duo noted. The stock market has potential to move into the 2000 region into late October or early November.
Riesner had been watching technical support in stock sectors such as semiconductors, consumer staples, discretionary and housing. Friday’s sell-off saw all these support pivots evaporate. In fact, Friday witnessed the completion of a wave five bull cycle reversal in the SOX semiconductor index.
“Together with the divergence on the volatility side in the VIX, and the Russell-2000 vola index, our weekly trend work turning short, plus the SPX breaking its early September trading low at 2157, we have clear evidence that our suggested September top is in place,” Riesner and Muller wrote. “At the end of the day the top came in a few days earlier than favoured but with trading in the time window of our September top projection we get a relative clear and significant signal that the top is in.”
While the market may sell-off in the short term, the UBS trade desk analysts are longer term bulls, speculating buyers will emerge to embrace stocks late in 2017.
UBS technical analysts – Bond market could drive stocks
Driving the stock selling in part is the bond market. Riesner and Muller have been closely watching the ten-year note 1.60% level. A break and hold of this level would violate the 2015 price downtrend “which is a game changer for the US bond market.”
“The recalibration of US yields will be very likely one of the key themes on the macro side and in financial markets in 2017,” they wrote. Tactically, a move higher in yields into Q4, we see as the trigger for higher cross-asset volatility and therefore as the trigger for our suggested September top in the SPX and global equities.”
The move in yields could experience back and forth action as yields could move back down in the early fourth quarter. “A new tactical down leg in yields into Q1 2017 would be in our view more part of a long-term basing process, which we expect to complete in Q1 2017 as the basis for the real move higher in US yield.”
Higher US interest rates could ultimately lead to bullishness for the US dollar and might also be a headwind for gold, commodities sna emerging markets, which the pair think could witness a correction into October. In August Riesner and Muller recommended buying volatility on dips and they reiterate that call in this newsletter as the dead calm markets that were the summer months of 2016 are over.