The purpose of this document is to present our technical long term views on differentasset classes.Before reviewing some monthly and weekly charts, we would like firstto point out two important observations.First, most of the markets we follow are caught in mid term (several months) complextrading ranges so that tactical asset allocations will be of paramount importance in2013.And second the correlation between equity indices is falling down meaningthat geographic bets will be of greater importance in 2013Summary of 2012 and the context for 2013After the flash crash in the summer of 2011, the market has entered a particularlyvolatile period of transition and that led to the validation of major bullish reversalpatterns : a new uptrend was born.A deep correction occurs in Q2 2012 but long term supports have held up well and theaccumulation zone correctly played its role sothat the recovery was very strong.Recently another (shallow) correction unfold but recent bullish reactions confirmedour view that indices are unlikely to make major selloffs in the coming weeks.For the beginning of 2013, we could see an upward acceleration toward the 2000 and2007 peaks for the S&P 500 and toward 290-300 for the Stoxx 600.Around those technical levels, the upward cycle could be ending because most of thetechnical targets would have been achieved and the index may enter into a morerandom, erratic period. The timing for the next uptrend wave should be occurringbetween now and Q1 2013.1)Our views on equitiesThe S&P500For now, there are no signs (reversal patterns) anticipating a possible trend reversal.Accordingly, the more likley scenario for the coming weeks/months is that of anupcoming test of the historic highs at 2000 and 2007, above 1500.Those levels are undoubtfully powerful resistances which, even in a bullish context,will be able to polarize prices for a few months.However, remaining divergences with long term indicators, volumes that have notconfirmed the recovery since July and divergences between the Dow Industrials andthe Dow transports (which remained below their 2011 highs) mean there is a high riskfor a correction when prices will test their historic highs.What to watch : the highs of 2007 and 2000.Also, this cyclical bull market will be 4years old (the average age) in March 2013.
Long term the index is approaching the upper part of its trading range More and more technical indicators are now diverging from prices.The Stoxx 600&DJ Euro Stoxx 50The main difference with the S&P is that the next resistances layer of the Stoxx 600 isless robust and critical. On the DJ Euro Stoxx 50 above the 2600 resistance level,European equities could rally a lot more before hitting the 3000 long term resistance.These observations match well with our idea of a continuing outperformance ofEuropean markets.Moreover European leadership is historically associated withstrong returns for global equities. Since 1990, the MSCI All Country Index returned
an annualized 19.6% when Europe was the best-performing region, against averagegains of 3.7% over the period .What to watch : European indices have held above major support levels, like 2400 onthe EuroStoxx 50But like the S&P 500, due to negative divergences still in place with long termtechnical indicators, there is a high risk for a correction after the index reaches ourlong term technical targets near major resistance zones.Sector leadership : has remained stable during the last weeks of 2012 with Financialsand Industrials continuing to outperform and Telcos, Utilities and Oils, leading to thedownside. This is consistent with a bullish underlying market.For 2013, you can see on the “ relative rotation graphs” that previous leaders likeHealth Care and Food&beverages are losing momentum.Even if their trends are stillstrong, we advice caution for these 2 sectors.On the contrary, Basic Resources is veryoversold with momentum improving.This lagging sector could be bouncing stronglyin the beginning of 2013. Above 2600 there is room for the upside toward 3000
Sector rotations in Europe during the past 3 months show financials leadershipsand Utilities, Oil&Gas and Telecom lagging way behind.These trends are notoverextented.The NikkeyThe index broke above the 9,200 resistance zone, confirming the anticipated upsidebreakout. Further rise favoured towards the 10,000 area.We continue to see a significant improvement of most weekly and monthly trendindicators which confirms the start of a trend improvement.What to watch : as long as the index remains above 9200, any pullback would beseen as a buying opportunity.
Breaking out above 9200 but the index remains volatileThe MSCI Emerging MarketsThe two-year underperformance of EM equities may be over.You can see that therelative chart vs the MSCI World ex-emerging is close to the lower part of its longterm uptrend.We have a clear preference for Asia.After 3 year of underperformance vs the MSCI World ex-emerging therelative chart is now on right on the ascending trendline support.
2)Our views on bondsThe German 10 year yieldsEven if the long term trend is still down, the chart shows that the recent decline ofyields looks extremely speculative.In the past every time the monthly RSI has fallen below oversold levels, bond yieldsstarted a significant recovery lasting between 1&2 years.Similar excess were seen in 1994,1999, 2005 and 2010.(see arrows on chart)Right now a buy signal on the RSI was given end May 2012.What to watch : to validate the start of a significant bullish reversal, (but not asignificant change of the major downtrend) yields must surpass 1.73 which was thehigh made in September 2012.In terms of asset allocation a switch out of bonds intoequities could be triggered by a break of recent bond yields ranges. Still a long term downtrend but an oversold bounce should occur in 2013Spanish&Italian 10 year yieldsItalian and Spanish 10 year yields have recently broken important supportzones.Italian yields resume their bear trend targeting 4% while Spanish yields havebroken their uptrend targeting 4.82%.From an FX perspective this means stay bullish€ vs $.
3)Our views on the €,$ and commoditiesThe €The rate was close to reach our long term target of 1.2.with large traders bettingstrongly against it.(very big short position)
The Euro had a breakout above an important down trendline, this was a bullish sign.We think this was the first leg up with more to come in 2013.Weekly and daily Macd are bullish.What to watch :to begin another bullish wave the rate must first surpass resistancezone above 1.305.Arrows on the chart show that the last 2 “counter trend rally” for the € had the sameamplitude and duration.It is important to keep in mind that even if the € reaches 1.4, the long term trend isstill down. The € could reach 1.4 in 2013The $ and commoditiesWe think the 2 assets are close to make reversal patterns.You can see this on the chartof the US dollar index where there could be a potential big bearish head and shoulderspattern.On the other hand on the chart of the CCI index (commodities), one couldobserve a big bullish inverse head and shoulders pattern.For now these 2 patterns arenot yet activated but if this scenario happens it will be consistent with our forecasts ofa rise of the € and a fall of bond prices.
The US dollar vs Commodities: watching closely a possible trend reversal in 2013GoldLong term, gold continues to rise versus every currency we track .Gold is correcting but we think it is a buying opportunity as large traders are nowaccumulating long position.Gold is consolidating its long term uptrend. Traders are beginning to accumulate longposition.(bottom pannel)
4)Topics-Convictions-Buy Europe equities vs US equitiesThe ratio SP500/Stoxx 600 shows that a new cycle of stronger European markets is inplace since June of this year.-Buy Asia
We prefer Asia (bottom pannel) versus Latin America and Eastern Europe (toppannel)IndiaThe Sensex recently made a 12 month high breakout.China H shares
After months of trading range, the Hang Seng China Entreprise broke above 10.000points. Same breakout pattern for the MSCI ChinaThe Shanghai Composite (for local investors) is very oversold but this index remainsin downtrend and all technical bounce attempts have been short lived so far.-Buy European luxury goodsThe absolute and relative trends versus the Stoxx 600 show continuingoutperformance.-Avoid high dividend stocks in EuropeUsing the Stoxx Europe Select 30 index as proxy, you can observe that the relativechart versus the Stoxx 600 is caught in a long term downtrend since 2007.
Price diverging from long term technical indicators and the investment grade spreadclose to support zone may indicate a mature trend (but not a reversal yet).-Buy Asian currenciesMost of them are caught in strong uptrends versus the Euro. The Asian Dollar Indexrecently broke successful above the 118 level. Generally speaking appreciatingcurrencies have been a tailwind for Asian equity markets.4)Summary of our views for 2013Bullish on equity until indices reach their respective targets which are close to majorresistances.(end Q1- Q2)Preferences for European and Asian equities.Bullish €, (until 1.40), gold, Italian&Spain10 year yields.Bearish $.Neutral on the German 10 year yields with a bullish bias above 1.73% (bearish biasbelow 139 on the future)