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  • 1. 7 January 2013January 2013 Technical Market OutlookPeter Lee – Chief Technical StrategistWealth Management ResearchThis report has been prepared by UBS Financial Services Inc. (“UBS FS”).
  • 2. Highlights• US Equities – The ability of SPX to maintain support along 1,343.35 on 11/16/12 or close to its 61.8% retracement from Jun to Sep 2012 rally prevented a deeper or more extensive correction. In addition, a positive outside day reversal pattern also on 11/16/12 and 3 subsequent positive outside days suggest the cyclical bull can sustain a while longer. The next key challenge is for SPX to clear above its Sep/Oct 2012 highs of 1,471-1,475. Above which opens the door for SPX to resume its 2009 cyclical bull rally allowing it to challenge its 2000/2007 record highs of 1,553-1,576. Key initial support is evident along 1,385-1,398 or the convergences of major moving averages including 150-day/200-day/10-month and the Dec 2012 lows. Failure to maintain support here suggests a decline to secondary support at 1,343.35 coinciding with Nov 2012 reaction low. Violation here opens the door for a sharp decline to pivotal intermediate term support at 1,267-1,280 corresponding to the Jun 2012 low and the important Mar 2009 uptrend. Violation of 1,267 is technically significant as this warns of the end to the 3+ year cyclical bull rally and signals either the start to the next major correction (10%- 20%) or worse, the start of the next cyclical bear decline (20%-30+%).• US Dollar Index – A US Dollar Index remains in a long-term secular downtrend as represented by the 20+ year head/shoulders top pattern. However, a large fan formation dating back to 2001-2002 hints of the possibility of an intermediate term USD recovery. A convincing surge above the third downtrend in the low-80s is still needed to complete this major trend reversal. In the meantime, USD is likely to remain volatile as it trades within a wide range between 71-73 and 86.5-89 corresponding to the top and bottom of a large but yet unresolved symmetrical triangle pattern that dates back to 2005. On a near-term perspective, USD has recently broken the bottom of its 2011 uptrend channel near 81-82. Failure to recover above its breakdown level suggests a decline to 78-78.5 coinciding with the Feb/May/Sep 2012 lows and establishing the potential for neckline support to a 1- year head/shoulders top pattern. A confirmed neckline break down below 78-78.5 renders downside targets towards the mid-70s and possibly as low as the Mar/Apr 2008 lows at 71.05-71.21.• US 10-Year Treasury Yields – The longer-term downtrend in rates will likely persist for a while longer as evident by the 4-year symmetrical triangle breakdown below 2.5% during Jul/Aug 2011. This breakdown suggests downside target to as low a 0.5%, long-term. In addition, a technical break below 1.85% during May 2012 also suggests downside to 1.00-1.15%. Although rates can fall further, the recent breakout above the top of a 5-month trading range at 1.89% or the Aug/Sep/Oct/Dec 2012 highs as well as a larger 3-year falling wedge breakout warn of a counter trend rally to 2.06%- 2.15% or the Apr 2012 downside gap and the 61.8% retracement of the Mar-Jul 2012 decline. The ability to clear above 2.15% may extend the rally to as high as 2.4-2.5% corresponding to the Oct 2011/Mar 2012 highs, mid-2011 technical breakdown level, middle of the long-term linear regression band, and the 30-month ma. Initial support is now evident along 1.65-1.70%. Secondary support also coincides with the 2012 lows at 1.39-1.55%.• Commodities – Since the low of 307.84 on Dec 2008 the Goldman Sachs Commodity Index has been trying to rebuild its technical base as evident by a large symmetrical triangle dating back to 2008. The coiling pattern is nearing its apex and the convergence of key moving averages suggest an impending inflection point. The top of triangle is declining around 685 and the bottom of triangle is rising along 600 providing respective key resistance and key support. In addition, since 2011 a potential head and shoulders bottom formation may be taking shape. Left shoulders are visible along 573 and 613. Head appears near the 2012 low at 556. Left shoulder is also evident taking shape near 622. Neckline resistance resides around 685.• S&P 500 Sectors – SPX ended the year (2012) with an impressive gain of 13.41% or nearly doubling the historical average (dating back to 1942). The 2 S&P 500 leading sectors were: S&P Financials (26.26% YTD), S&P Consumer Discretionary (21.87%) and S&P Healthcare (15.19%). The laggards for the year were: S&P Utilities (-2.91%YTD), S&P Energy (2.33%) and Materials (7.52%). For this year, we continue to recommend a balanced equities portfolio consisting of a bar bell approach to equities investing with the current tilt favoring the growth and defensive cyclicals side. This is akin to a fixed income barbell strategy of purchasing short and long-term maturities. One side of the equity portfolio consist of defensive, low beta, dividend producing equities (i.e., Consumer Staples, Utilities, Healthcare, MLPs, REITs, Dividend Growth, and etc.). The other side of portfolio is comprised of growth securities/ defensive cyclicals (i.e., Technology, Consumer Discretionary, Energy and Nifty-fifty 2 stocks). 1
  • 3. Major Technical Trends – SPX Index• Secular Trend (8-20 years) – Entering into the 2nd half of a long-term structural sideways trading range Since 1800, the lengths of US stock market structural trends have been from as short as 8 years to as long as 20 years. The average is then 14 years. We believe the March 2009 low marks the midpoint of a long-term secular trading range market that began on Mar 2000. Under a worse case scenario, this would then imply another 5-8 years of sideways trading before the start of the next secular/structural bull market. Under the best case scenario this would then suggest another 2 years remaining until the start of the next major bull. In the meantime, SPX will likely remain confined to a trading range between 1,000 +/- 100 on the downside and 1,575 +/- 100 on the upside with the statistical midpoint of this range or the equilibrium/fair value around 1,120-1,160. The optimist (Bull) would say the glass is half full, while the pessimist (Bear) would say the glass is half empty. We, on the other hand, are neither bulls or bears but a realist -– and as such, we will be opportunistic trading the cyclical bull rallies and avoiding the cyclical bear declines neither overstaying our welcome.• Primary Trend (1-3 years) – 2009 Cyclical Bull rally ends and the next major correction or Cyclical Bear begins Although the Mar 2009 cyclical recovery/cyclical bull rally is maturing one final rally is still possible before the onset of a cyclical top and the start of an extensive correction (10%-20%) or possibly another cyclical bear (20%-30+%). We will be monitoring for signs of speculation and narrowed market breadth as these are the classic technical signs that often precede a major market top. SPX is vulnerable for a deep correction or worse, a cyclical bear decline during the 2nd half of 2013 into the better part of 2014. The above premise is loosely based on the historical tendencies for US equities to be weak during the first 2 years of a US Presidential cycle (2013-2014) and stronger during the last 2 years (2015-2016) of the cycle. We also believe that another major 4-year Mid-term Election Year bottom will likely develop during 2014.• Intermediate Trend (4-12 months) – 3+ year old cyclical bull is maturing but one final sustainable rally is possible The strong gains over the past 3 years suggest the easy money has already occurred. For instance, SPX has produced gains of 16.4%, 37.2% and 121% from its respective Jun 2012 low (1,266.74), Oct 2011 low (1,074.77) and Mar 2009 low (666.79) to recent Sep 2012 high of 1,474.51. The Apr to Jun 2012 correction of nearly 11% have alleviated an overbought condition and set into motion the Jun to Sep 2012 rally. The ensuing Sep to Nov correction of -8.9% and the subsequent rally from Nov 2012 low may be the last leg of the 3+ year cyclical bull rally. If speculation develops into this final rally SPX can retest and possibly exceed its all-time highs of 1,553-1,576 within the next 4-12 months.• Short-term Trend (1 week-3 months) – A consolidation phase can lead to the resumption of Cyclical Bull trend A modest overbought condition may develop as SPX nears its Sep/Oct 2012 highs along 1,471-1,4755. A normal pullback to initial support at 1,385-1,398 alleviates overbought condition and sets the stage for a breakout above Sep/Oct 2012 highs at 1,471-1,475. Above 1,475 renders upside targets to 1,500-1,510, near-term and then 2000/2007 record highs of 1,553- 1,576. Nov 2012 low of 1,343.35 remains key secondary support. Major intermediate term support is along 1,267-1,280 or June 2012 low and March 2009 uptrend. Violation here signals the start of a major correction and/or cyclical bear decline. 2
  • 4. Psychology of the 2007-2009 Bear Market• Psychology of a Bear Market often 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 and 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 – US government takeover of Fannie Mae and Freddie Mac, Lehman Brothers files for bankruptcy, Merrill Lynch sold to BAC, AIG bailout, and QE1 announced soon after) – Institutional investors capitulated. – Stage 5 – Acceptance (i.e., Jan 2009 to March 2009) – Market Capitulation – Selling Climax phase – Retail investors capitulated.• Cyclical Bull ends in 2012/Cyclical Bear in 2013-2014 & new Cyclical Bull in 2014-2016• Cyclical Bull rallies in the past tend to sustain for 1 to 3 years. A normal US business cycle typically last on the average from 4 to 6 years. The US stock market often discounts economic peaks and troughs months and quarters ahead of the actual occurrences. The prior cyclical bull rally from October 2002 to October 2007 was one the longest cyclical bull ever recorded enduring for 5 years. The current SPX cyclical bull which started in earnest on March 2009 from a low of 666.79 is over 3+ years. From the March 2009 bottom to recent high SPX has appreciated over 121% placing this cyclical bull as one of the strongest cyclical bull in recent memories. So the pertinent question then becomes – when will this cyclical bull end? Our longer-term technical studies show US equities often closely track US political Election Year cycles (i.e. Mid-term Elections and Presidential Elections). This relationship is especially true in the absence of a well defined structural bull trend. Historically, US stock markets tend to be stronger during the last 2 years of a 4-year US Presidential cycle (2011-2012) and weaker during the first 2 years of a US Presidential cycle (2013-2014). This suggests the March 2009 cyclical bull/recovery is likely to end during the fourth or fifth year (2013-2014). An extensive/prolonged correction or worse, the start of the next cyclical bear decline can begin as early as the first 2 years of the US Presidential cycle (2013-2014) The good news is this setback can also lead to the next mid-term Election year market bottom in 2014 setting the stage for the next cyclical bull rally (2014-2016). 3
  • 5. Psychology of the Market – Fear, Greed and Hope Source: UBS WMR, as of 4 January 2013. Greed/Euphoria – 1st Half 2007 Greed/Euphoria – 1st Half 2013 Thrill Anxiety Are we Thrill here? 2nd half of 2013 Excitement Denial Excitement Optimism Fear Optimism – 1st Qtr 2012 Desperation – 1st Half 2008 Relief Panic Hope Capitulation Despondency – 4th Qtr 2008 Depression – 1st Qtr 2009 2nd half of 2014 4
  • 6. SPX Index – Secular Trends from 1900 to Present Source: UBS WMR, as of 4 January 2013.10,000 Se cular Be ar Trading Range 2000-Pre se nt Se cular Bull 1,000 1982-2000 Se cular Be ar Trading Range 1966-1982 Se cular Bull 100 Se cular Be ar 1949-1965 Trading Range Se cular Bull Se cular Be ar 1929-1949 1921-1929 Trading Range 1906-1921 For the past 200+ ye ars, SPX has consiste ntly alte nate d be twe e n pe riods of 10 long-te rm bullishne ss v ia se cular bull tre nds and pe riods of long-te rm be arishne ss v ia se cular Be ar/Trading range tre nds without e v e r missing a cycle . 1 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2009Our Brave New World – Secular Trading Range Market Environment study published on August 2002 provided technical evidences to support our thesis thatthe US Equities market is an efficient market that have successfully alternated from one long-term secular trend to the next without missing a beat over thelast 200+ years. Since1800 (not shown on chart), the US stock market have sustained 14 distinct long-term secular trends – 7 of which were structural bulltrends and 7 were structural bear/trading trends. The 7 structural bulls were: 1982-2000, 1949-1966, 1921-1929, 1896-1906, 1861-1881, 1843-1853, and 1815-1835 and the 7 structural bear/trading range markets were: 1966-1982, 1929-1949, 1906-1921, 1881-1896, 1853-1861, 1835-1843 and 1802-1815. The longestof these structural trends sustained for 20 years and the shortest endured for 8 years. The statistical average was 14 years. It is our contention March 2000was the start of the 8th structural bear/trading range market. We find it uncanny that SPX has consistently self adjusted or mean reverted whenever it hasover extended itself either to upside (speculative bubbles) or to the downside (capitulation/panic selloffs). The durations of these previous secular bull andbear/trading range trends tend to be similar, averaging 14.7 years for secular bulls and 13.6 years for secular bears/trading range markets. Based on theabove technical developments, an optimist (Bullish camp) would claim the next structural bull trend can start as early as the 2nd half of 2013 or early 2014timeframe. A pessimist (Bearish camp), on the other hand, would claim that the current Secular Bear/Trading Range trend needs more time to developpossibly sustaining for the full 20-years or until March 2020 before the start of the next structural bull market. 5
  • 7. SPX Index – Annualized Returns from 1932/1942 to Present Chart source: Bloomberg as of 4 January 2013. 1942 Uptrend = 740 1932 Uptrend = 414The bears continue to favor the 1932 uptrend (white trend line) advocating an eventual retest of this uptrend now rising near 414. We, on the other hand,believe the 1942 uptrend (red trend line) now rising along 740 is the stronger and more dominant structural trend for SPX. Why? An uptrend gains strengthand significance with each successful tests. The 1942 uptrend recorded 4 successful tests as compared to 2 successful tests for the 1932 uptrend. Notice thatin two prior structural bear markets (i.e., 1929-1949 and 1966-1982) SPX gravitated to this prevailing red trend line before trending higher. We suspect thatthis time around SPX will likely follow a similar path. That is, an extensive sideways trading range (3-5 years) is probably necessary to first reset the numerousbubbles from the past cycle (i.e., Tech/Telecom, Real Estate, Credit and Financial) and second to establish the necessary technical base to sustain the nextstructural bull market. We believe only when the1942 uptrend (red line) catch up with the SPX price will SPX be ready for the next structural bull trend. 6
  • 8. SPX Index – Annualized Returns from 1932/1942 to Present Chart source: Bloomberg as of 4 January 2013. Since 1942 – annual % change = 6.73% Since 1932 – annual % change = 5.81%Since the 1942 uptrend cannot easily reverse direction and trend downwards, at least not from a mathematically perspective, and not in our lifetime, thiswould then imply the 1942 uptrend will progress higher continuing with its annualized percentage change of 6.73%. By extrapolating the 1942 uptrendagainst time this would then imply the trend line may converge around 850-1,000 by the end of 2014 thereby establishing the potential for a new majorfloor (support). This would then imply SPX does not necessarily have to retest the March 2009 low of 666.79. However, this also suggests SPX can sustainanother cyclical bear decline as early as the 2nd half of 2013 possibly leading to another Mid-term Election year cycle low during 2014. 7
  • 9. Similarities – DJIA 1966 to 1982 and SPX 1997 to Present Chart source: Reuters Bridge as of 4 January 2013. 1997 - Present 1966 - 1982 Death Cross Sell signal Midpoint = 820-830 Midpoint = 1,120-1,160 Golden Cross Buy 8 years to form Another 8 years signal left shoulders to form right shoulders 10 years to form left shoulders Head and Shoulders Bottom?? 16-year Head and Shoulders Bottom Another 8 years to establish right shoulders?Although no two markets are identical it is uncanny the 1966-1982 secular bear/trading range market closely resembles the current 1997-present market environment. Forinstance, the1974 bottom marked the midpoint of the 1966-1982 secular trading range market. However, another 8 years was required to establish the base (right shoulders)to sustain the next major structural bull market (1982-2000). Note the similarities between the DJIA 1974-1976 rally and the SPX 2009-2011 rally. If a major bottom (Headformation) occurred during March 2009 then does this then imply another 8+ years to establish the necessary right shoulders to complete the head/shoulders bottom pattern? 8
  • 10. SPX Index – Positive/Negative Outside Months Chart source: Reuters Bridge as of 4 January 2013. Positive Outside Months  Bullish Negative Outside Months  Bearish Negative Monthly Death Cross Sell Outside Months Negative Outside April 2001 and July 2008 = Feb/Jul 2007 Months = Jan, Jul, Negative Outside Months = and Sep 2000 Mar 04/Mar 05/May 06 Negative Outside Positive Month = Jan 2010 Outside Month = Positive Outside Months = Positive Outside Oct 1999 Oct 04/Jul 05/Jan 06 Month = Oct 2011 Monthly Golden Cross Buy Positive Outside on Jan 2004/June 2010 Positive Outside Month = Emerging Month = Jul 03 Market Crisis – Oct 98 Negative Outside Month = Jan 2009 Positive Outside Month = Positive Outside Month = Real 10-month ma = 1,402 Tech/Telecom Bubble – Mar 03 Estate, Credit, Deleveraging and 30-month ma = 1,310 Global Financial Crisis – Jul 2009Positive and negative outside reversal months have been reliable in alerting us to extreme market conditions associated with prior market tops and bottoms. These reversalpatterns seem to occur during major market bottoms/tops. For instance, 3 negative outside months during 2000 and 2 during 2007 warned of impending market tops thatsubsequently lead to the start of bear market declines. Conversely, positive outside months during 1998, 2003 and again on 2009 preceded major bull rallies. In addition, 10-month and 30-month moving average crossovers have accurately anticipated major cyclical bull/bear trends. The Oct 2011 positive outside month coupled with the risingtrends of both the 10-month and 30-month moving averages suggest that although the 2009 cyclical bull rally is maturing it can still sustain further. Nonetheless, we notethat formidable resistance appears as SPX nears its 2000/2007 record highs along 1,553-1,576. Will another negative outside month develop near the prior highs? 9
  • 11. Statistics on 4-Year Mid-term Election, 10-year Decennial Year,Jan Barometer and Pre-Election Year CyclesMid-term SPX Yearly Intra-Year Jan SPX Year Down Jan Jan CloselowMarket Mid-term DJIA Pre- DJIA GainsElection Returns Corrections 1953 -6.6% -0.7% -13.9% Bear Election low Election Yr Hi low-hi / Year1930 -28.5% -44.3% 1956 2.6% -3.6% 0.9% Flat1934 -4.7% -29.3% Jul 1914 Dec 1915 89.6% / 87.1% 1957 -14.3% -4.2% -12.8% Bear1938 24.6% -28.9% Jan 1918 Nov 1919 63.0% / 30.5% 1960 -3.0% -7.1% -6.0% Bear Jan 1922 Mar 1923 34.1% / -3.3%1942 12.4% -17.8% 1962 -11.8% -3.8% -24.0% Bear Mar1926 Dec 1927 49.7% / 28.8%1946 -11.9% -26.7% 1968 7.7% -4.4% -4.9% Cont. Bear Dec 1930 Feb 1931 23.4% / -52.7%1950 21.7% -14.0% Jul 1934 Nov 1935 73.6% / 38.5% 1969 -11.4% -0.8% -13.4% Bear1954 45.0% -4.4% Mar 1938 Sep 1939 57.6% / -2.9% 1970 0.1% -7.6% -18.6% Cont. Bear1958 38.1% -4.4% Apr 1942 Jul 1943 56.9% / 13.8% 1973 -17.4% -1.7% -20.6% Bear1962 -11.8% -26.9% Oct1946 Jul 1947 14.5% / 2.2% 1974 -29.7% -1.0% -35.5% Bear1966 -13.1% -22.2% Jan 1950 Sep 1951 40.4% / 14.4% 1977 -11.5% -5.1% -11.1% Bear Jan 1954 Dec 1955 74.5% / 20.8%1970 0.1% -25.9% 1978 1.1% -6.2% -2.6% Cont. Bear Feb 1958 Dec 1959 55.5% / 16.4%1974 -29.7% -37.6%1978 1.1% -13.6% 1981 -9.7% -4.6% -13.0% Bear Jun 1962 Dec 1963 43.2% / 17.0% 1982 14.8% -1.8% -14.9% Cont. Bear Oct 1966 Sep 1967 26.7% / 15.2%1982 14.8% -16.6% 1984 1.4% -0.9% -9.5% Flat May 1970 Apr 1971 50.6% / 6.1%1986 14.6% -9.4% Dec 1974 Jul 1975 52.7% / 38.3%1990 -6.6% -19.9% 1990 -6.6% -6.9% -10.2% Bear Feb 1978 Oct 1979 21.0% / 4.2%1994 -1.5% -8.9% 1992 4.5% -2.0% -3.5% Flat Aug 1982 Nov 1983 65.7% / 20.3%1998 26.7% -19.3% 2000 -10.1% -5.1% -9.3% Bear Jan 1986 Aug 1987 81.2% / 2.3%2002 -23.4% -33.8% 2002 -23.4% -1.6% -31.3% Bear Oct 1990 Dec 1991 34.0% / 20.3%2006 13.6% -7.7% 2003 26.4% -2.7% -6.4% Cont. Bear Apr 1994 Dec 1995 45.2%/ 33.5%2010 12.8% -16.0% 2005 3.0% -2.5% -3.7% Flat Aug 1998 Dec 1999 52.5% / 25.2% 2008 -38.5% -6.1% -46.3% Bear Oct 2002 Dec 2003 43.5% / 25.3%Avg. (21) 4.5%(ex div) -20.4% Jan 2006 Oct 2007 33.18% / 6.4% 2009 23.46% -9.4% -28.6% Cont. Bear1930-2010 7.1% (ex div) -21.8% Jul 2010 May 2011 33.93 / 27.08 2010 12.8% -3.7% -5.87% Cont. BearDecennial SPX Yearly Intra-Year Avg. (24)Year (0) Returns Corrections Avg(24) -4.0% -3.9% -14.4% May Sep(15.5 mo) 48.6% / 18.1%1930 -28.5% -44.3%1940 -15.1% -29.6% 24 Down Januarys  13 SPX down Yrs and 11 up Yrs Highest frequencies of Mid-term lows:1950 21.7% -14.0% Jan (6) and Oct (4)1960 -3.0% -11.5% Highest frequencies of Pre-election highs:1970 0.1% -25.9% Dec (9) and Jul/Sep/Nov (3 each)1980 25.8% -17.1%1990 -6.6% -19.9%2000 -10.1% -17.2%2010 12.8% -16.0%Avg. (9) -0.48% -21.7% Source: UBS WMR, as of 4 January 2013. 10
  • 12. S&P 500 Index Statistics - Mid-term to Pre-Election Year, Sept& Oct Mid-term Returns and Frequencies of BottomsMid-term Election Years Only Mid-term % Mid-term % Mid-Term % of Following Septembers Change Octobers Change Low / Month Occurrences TotalMid-term Intra-Day Years 9/30/1934 -0.77% 10/31/1934 -2.97% January 5 25.00%Elections Low Close % Change 9/30/1938 1.49% 10/31/1938 7.60% 1950 (Bull); 1954 (Bull); 1958 (Bull); 1986 (Bull); 1998 (Bull) 1934 8.36 13.43 61% October 5 25.00% 1938 8.5 12.46 47% 9/30/1942 2.67% 10/31/1942 5.76% 1946 (Bear); 1966 (Bear); 1974 (Bear); 1990 (Bull); 2002 1942 7.47 11.67 56% 9/30/1946 -10.15% 10/31/1946 -0.80% (Bear) 10 out of 20 or 1946 14.12 15.3 8% 9/30/1950 5.59% 10/31/1950 0.41% April 2 10.00% 50% or the Mid- 1950 16.66 23.69 42% term Election 9/30/1954 8.31% 10/31/1954 -1.95% 1942 (Bear; 1994 (Bull) 1954 24.8 45.48 83% bottoms occurred 1958 40.33 59.89 48% 9/30/1958 4.84% 10/31/1958 2.54% March 2 10.00% during Jan/Oct. 4 1962 52.32 75.02 43% 9/30/1962 -4.82% 10/31/1962 0.44% 1938 (Bear);1978 (Bear) of 5 or 90% of 1966 73.2 96.47 32% 9/30/1966 -0.70% 10/31/1966 4.75% Oct bottoms June 2 10.00% 1970 69.29 102.09 47% occurred during 9/30/1970 3.30% 10/31/1970 -1.14% 1962 (Bull); 2006 (Bear) bear/trading 1974 62.28 90.19 45% 9/30/1974 -11.93% 10/31/1974 16.30% July 2 5.00% range markets. 1978 86.9 107.84 24% 9/30/1978 -0.73% 10/31/1978 -9.16% 1982 (Bear); 1982 102.2 164.93 61% 2010 (Bear) 9/30/1982 0.76% 10/31/1982 11.04% 1986 202.6 247.08 22% 1990 294.51 417.09 42% 9/30/1986 -8.54% 10/31/1986 5.47% May 1 5.00% 1994 435.86 615.93 41% 9/30/1990 -5.12% 10/31/1990 -0.67% 1970 (Bear) 1998 912.83 1469.25 61% 9/30/1994 -2.69% 10/31/1994 2.08% August 1 5.00% 2002 768.63 1111.92 45% 1982 (Bear) 9/30/1998 6.24% 10/31/1998 8.03% 2006 1219.29 1478.49 21% February 0 0.00% 9/30/2002 -11.00% 10/31/2002 8.64% 2010 1010.19 1257.6 24% September 0 0.00%Mid-term Years AVERAGE: 42.7% 9/30/2006 2.46% 10/31/2006 3.15% November 0 0.00% 9/30/2010 8.76% 10/31/2010 3.69% December 0 0.00%All Years - 1928-2009 AVERAGE: 29.0% 20 100% % of years S&P decreased: 15.0% All periods: -0.60% 3.16% Positive Sept: 4.45% Positive Oct: 5.71%All Years ex Mid-term AVERAGE: 25.5% No Occurrences % of years S&P decreased: 19.0% towards the Applying 42.7% to SPX 2010 mid-term low of end of the year Applying 25.50% to 1,010.91 1,010.91 suggests upside to 1,443Source: UBS WMR, as of 4 January 2013. brings SPX to 1,269 11
  • 13. SPX Seasonality Study – Monthly Returns from 1929-2012 Weak Feb-May timeframes during Presidential Election years often set the stage for strong Jun to Aug (6.59%) followed by normal seasonal weakness during Sept to Oct (-0.68%) and then seasonal strength into year end from Nov-Dec to next Jan 2013 (1.87%).Source: Reuters, Bloomberg and UBS WMR, as of 4 January 2013. 12
  • 14. Possible Scenarios for SPX during 2013Scenario 1 = March 2009 cyclical bull is maturing but this rally can sustain further into 2013• Probability = 65%• The Jun 2012 to Sep 2012 rally (16.4%) led to another overbought market condition prompting another round of consolidation as SPX declined 8.90% from Sep to Nov 2012. The ability of SPX to maintain support along 1,343.35 on 11/16/12 or close to its 61.8% retracement from Jun to Sep 2012 rally prevented a deeper or more extensive correction. In addition, a positive outside day reversal pattern also on 11/16/12 and 3 subsequent positive outside days suggest the cyclical bull can sustain a while longer. The next key challenge is for SPX to clear above its Sep/Oct 2012 highs of 1,471-1,475. Above which opens the door for SPX to resume its 2009 cyclical bull rally allowing it to challenge its 2000/2007 record highs of 1,553-1,576. Because this is a cyclical recovery and not a structural recovery record highs may be a false breakout signaling the potential for a major top. Key initial support is evident along 1,385-1,398 or the convergences of major moving averages including 150-day/200-day/10-month and the Dec 2012 lows. Failure to maintain support here suggests a decline to secondary support at 1,343.35 coinciding with Nov 2012 reaction low. Violation here opens the door for a sharp decline to pivotal intermediate term support at 1,267-1,280 corresponding to the Jun 2012 low and the important Mar 2009 uptrend. Violation of 1,267 is technically significant as this warns of the end to the 3+ year cyclical bull rally and signals either the start to the next major correction (10%-20%) or worse, the start of the next cyclical bear decline (20%-30+%).Scenario 2 = A tail risk event triggers global risk aversion (risk off) and the start of a cyclical bear decline• Probability = 20%• We believe the European Sovereign Debt crisis has not been fully resolved and the fears of a double dip recession in developed and emerging markets can still escalate into global risk aversion (risk off). In addition, the Fiscal Cliff debacle can also lead to market turmoil this year. However, as we have learned from the prior years, accurately predicting tail risk events are futile, in our view. Nonetheless, we suspect the recent kicking the can down the road solutions to the ongoing Fiscal Cliff as well as the ECB – OMT and the FED – QE3 programs may have only pushed out existing structural macro/geopolitical concerns out further. From a technical perspective, to confirm a major market top and to end the Mar 2009 cyclical bull rally SPX must breech its intermediate term support zone coinciding with 1,267-1,280 coinciding with the Jun 2012 low and the Mar 2009 uptrend. Only then will this confirm a major technical breakdown and set into motion the start of a deeper correction and/or cyclical bear decline. Under this scenario, SPX can fall towards the pivotal Aug/Oct 2011 lows at 1,075-1,102 and possibly retest the Jul/Aug 2012 Mid-term Election Year bottoms at 1,011-1,040.Scenario 3 = Market melts up via persistent and sustainable buying creating the next structural bull trend• Probability = 15%• This bullish “Market Melts Up” call has faded into the end of last hear as uncertainties surrounding the Fiscal Cliff escalated. Nonetheless, we believe this optimistic view is predicated on the following key developments: (1) continued sustained injection of liquidity into the financial system; (2) Sovereign Debt crisis in Europe is resolved; (3) economic concerns in Emerging and Developed economies subside; (4) a major asset allocation shift from Fixed Income investments to Equities; (5) sustainable buying by institutional investors as they cover their shorts/defensive hedges and deploy cash into stock market; and (6) a paradigm shift in technology and/or a medical/industrial/energy breakthroughs that lead to wide spread optimism/buying. Technically speaking, to validate a structural bull trend (8-20 years) SPX needs to convincingly breakout above its prior Mar 2000/Oct 2007 record highs of 1,553-1,576 on broad market breadth and accompanied by the emergence of new leadership markets, sectors and stocks. 13
  • 15. SPX Index – Longer Term Outlook (1+ year) Chart source: Reuters Bridge as of 4 January 2013. 1,553.11 – Mar 2000 highs 1,576. 09 – Oct 2007 highs Long-term trend = secular trading range Intermediate-term trend = maturing cyclical bull Death cross Short-term trend = sustainable rally sell signal Important lows: Mar 09 low = 666.79 Jul 09 low = 869.32 July 10 low = 1,010.91 Aug 10 low = 1,039.70 Aug 11 low = 1,101.54 Golden cross Oct 11 low = 1,074.77 buy signals Nov 11 low = 1,158.66 Dec 11 low = 1,202.37 768.63 – Oct 2002 low 666.79 – Mar 2009 low Jun 12 low = 1,266.74 Positives: (1) SPX trading above its 10 and 30-month moving Nov 12 low = 1,343.35 averages; (2) 2007 downtrend breakout confirmed and (3) Mar 2009 cyclical bull trend remains intact. 10-mo ma = 1,402 30-mo ma = 1,310 Negatives: (1) Strong resistance evident near prior Mar 2000/Oct 2007 highs at 1,553-1,576; (2) 3.5 year old rally is cyclical and not structural; (3) long-term risk/reward profile suggests market vulnerability as upside potential is 1,575 +/- 100 and downside risk is 1,000 +/- 100.A secular trading range between 1,000 +/- 100 on the downside and 1,575 +/- 100 on the upside is likely to persist for the next 5-8 years. Over the past 12 years therehave been two cyclical bear declines (2000-2002 and 2007-2009) followed by two cyclical bull rallies (2002-2007 and Mar 2009-present). The current Mar 2009 cyclical bull,although maturing can sustain further. Why? Unlike the two previous major market tops (2000-2002 and 2007-2009) we note the following: (1) a monthly golden crosstechnical buy signal remains in effect as the 10-month ma is trading comfortably above its 30-month ma and both trends are still rising; (2) 2007 downtrend breakoutaround 1,290-1,300 in Jan 2012 reaffirmed the continuation of the Mar 2009 cyclical bull rally; and (3) although corrections (5-10%) will continue this year the ability ofSPX to maintain two key supports (1,343 and 1,267-1,280) will likely contain any corrections from escalating into deeper setbacks and/or cyclical bear declines. Since manybull markets in the past typically end on the backdrop of excessively bullish market sentiments we suspect SPX will need to rally above 1,553-1,576 to trigger widespreadspeculation and hence extreme optimism. If this scenario develops during 1st half 2013 we believe the second half of 2013 into 2014 may prove to be quite challenging. 14
  • 16. SPX Index – Intermediate-term Outlook (4-12 months) Chart source: Reuters Bridge as of 4 January 2013. Jul/Oct 07 highs = 1,544.90-1,576.09 1,575-1,600 May 2008 high = 1,440.24 1,370.58 Width of channel = 350 1,290 1,219.80 1,280 1,007.51 1,074.77 1,010.91 Top of SPX 2009 uptrend channel is at 1,575-1,600 and the bottom of the channel is at 1,280 +/- 10. Since SPX is 10-week ma = 1,411 currently trading at 1,466 or near the middle of its 3+ year 30-week ma = 1,406 uptrend channel the risk profile is 134 (upside) and 186 666.79 (downside) or basically a Neutral 1:1 risk/reward ratio.Violation of two bearish rising wedge patterns (red arrows) still warn of a maturing cyclical bull rally. These two technical break downs suggest the cyclicalrecovery is maturing. Nonetheless, we suspect the 3+ year cyclical bull rally that started on Mar 2009 at 666.79 can still sustain into 2013 before a cyclicaltop develops. The above technical study suggests SPX can still return to its prior 2000/2007 record highs of 1,553-1,576 and even set new all-time highs(1,600) as evident by the convergence of 4 key trend lines. On the downside, a violation of the Nov 2011 uptrend which is now rising at 1,390 +/- 10 aswell as the Nov 2012 reaction low of 1,343.35 will likely trigger a retest of the bottom Mar 2009 uptrend at 1,280. Also note that key intermediate termsupport resides along the Jun 2012 low and the extension of the Oct 2007 downtrend breakout at 1,267-1,290. Violation here warns of the end to theMar 2009 cyclical rally/recovery and the start of an extensive correction (10-20%) or worse, the start of the next cyclical bear decline (20-30+%). 15
  • 17. 1,610-SPX Index – Short-term Outlook (1-3 months) 1,620 Chart source: Reuters Bridge as of 4 January 2013. 1,530 1,471-1,475 30-day ma = 1,423 50-day ma = 1,412 150-day ma = 1,398 200-day ma = 1,391 1,406 1,360 Mar 12 low = 1,340.03 50% = 1,317 Oct 11 high = 1,292.66 61.8% = 1,279 Jun 12 low = 1,266.74 76.4% = 1,233 Dec 11 low = 1,202.37 Nov 11 low = 1,158.66 Oct 11 low = 1,074.77Despite the 8.9% correction from the Sep 2012 high of 1,474.51 and the potential for a Fan formation we are encouraged to find SPX maintaining its pivotal thirduptrend (blue trend) from the Nov 2011 low (1,158.66). This successful test of key support at 1,343.35 during Nov 2012 prevented a deeper correction but also set intomotion the start of a year end rally. A subsequent positive outside week pattern (red dash circle) to start the New Year (2013) is technically promising as this recent strongprice momentum can lead to a retest of the Sep/Oct 2012 highs at 1,471-1,475, near-term. A convincing move above this prior reaction high can trigger the nextsustainable rally that brings SPX to a retest of the Mar 2000/Oct 2007 Tech/Telecom and 2007 Global Financial crisis at 1,553 and 1,576, respectively. On the downside, theNov 2011 uptrend at 1,390 +/- 10 provides key near-term support. Violation of support here opens the door for a retest of the Nov 2011 low at 1,343.35. A break downbelow 1,343 confirms a major breakdown and suggests a deeper correction to intermediate term support corresponding to the Mar 2009 uptrend (1,280), Jun 2012 low(1,266.74) and the 61.8% retracement (1,279) from Nov 2011-Sep 2012 rally. 16
  • 18. 1,600- 1,610SPX Index – Trading Outlook (1-4 weeks) 1,465-1,475 1,530 Chart source: Reuters Bridge as of 4 January 2013. 1,470.96-1,474.51 1,448 1,426.68 1,398.23 1,398.11 Width = 70-75 points 1,385.43 1,363.46 1,334.93 Positive 61.8% = 1,346.11 1,343.35 outside days 1,329.24 76.4% = 1,315.77 Resistance = 1471-1475, 1490-1500, 1530, 1553-1576, 1600-1610 Support = 1430-1445, 1385-1398, 1343.35, 1315-1320, 1280-1290,1267, 1220, 1159-1166 1,266.74Violation of Jun 2012 uptrend channel at 1,425 in mid-Oct 2012 warned of downside risks to 1,345-1,355. A subsequent break of neckline support at 1,405 in early Nov2012 confirmed a head and shoulder top pattern dating back to Aug 2012 and also suggest downside target to 1,325. SPX quickly corrected 8.9% during Sep-Nov 2012 asselling subsided along 1,343.35 on 11/16/12 as it successfully held onto the pivotal 61.8% retracement from Jun-Sep 2012 rally at 1,346. A positive outside day pattern on11/16/12 and 3 additional outside day patterns on 11/28/12,12/5/12, and 12/31/12 have extended the technical rally to key resistance at 1,427-1,434 or to the prior Oct 2012breakdown. The ability to clear this supply can trigger a move to the Sep/Oct 2012 highs and the Sep 2012 downtrend at 1,471-1,475. A convincing move above 1,475suggests a retest of the Jun 2012 uptrend channel at 1,530 and possibly the Mar 2000/Oct 2007 record highs of 1,553-1,576 as early as the 1st half of 2013. Initial support isat 1,430-1,445 and secondary support is 1,385-1,398 or 150-day ma, bottoms of the late-Nov 2012 and Dec 2012 upside gaps. Violation of Nov 2011 low at 1,343.35 istechnically significant as this signals a deeper correction to key intermediate term support at 1,267-1,280 or the Jun 2012 low and Mar 2009 uptrend. 17
  • 19. US Dollar Index – Monthly Secular Long-term Trend Chart source: Reuters Bridge as of 4 January 2013.Long-term trend  Bearish Head and Shoulders Top Head = 120-121Intermediate-term trend  Neutral Symmetrical TriangleShort-term trend  Head and Shoulders Top pattern Left Shoulders Right Shoulders 103 Breakout above 88-92.5 88 83 69 Neckline Support = 69-71 Breakdown below 69-71 63Shorter-term range = 78.12-78.60 – 82-84.25 Top of band = 103 10-month ma = 81Intermediate range = 73-75 – 88-92.5 Middle of Band = 83 30-month ma = 79Long-term range = 69-71 – 103.5 Bottom of band = 63 18
  • 20. US Dollar Index – Retracement Study - Intermediate Chart source: Reuters Bridge as of 4 January 2013. Downtrend Channel 61.8% = 102.10 Head and Shoulders Top? 50% = 96.17 38.2% = 90.24 Breakout 23.6% = 82.91 10-week ma = 80.36 Dec 2004 low = 80.48 May 2006 low = 83.41 30-week ma = 81.03 10-month ma = 80.83 30-month ma = 78.73 Apr 2008 low = 71.05 BreakdownUS Dollar Index remains in a long-term secular downtrend as represented by the 20+ year head/shoulders top pattern in the prior chart. However, starting from 2008 lows(71.05) macro and geopolitical concerns including sovereign debt crisis in Europe and fears of a global economic slowdown have driven the US Dollar higher as globalinvestors turned to the relative safety of USD during periods of market uncertainties. A large fan formation dating back to 2001-2002 hints of the possibility of anintermediate term USD recovery. A convincing surge above the third downtrend in the low-80s is still needed to complete this major trend reversal. In the meantime, USDis likely to remain volatile as it trades within a wide range between 71-73 and 86.5-89 corresponding to the top and bottom of a large but yet unresolved symmetricaltriangle pattern that dates back to 2005. A breakout above 88 +/- 1 extends the rally to as high as 90.25-92.5 or to the 38.2% retracement from 2001-2008 decline and the2004/2005 highs. On a near-term perspective, USD has recently broken the bottom of its 2011 uptrend channel near 81-82. Failure to recover above its breakdown levelsuggests a decline to 78-78.5 coinciding with the Feb/May/Sep 2012 lows and establishing the potential for neckline support to a 1-year head/shoulders top pattern. Aconfirmed neckline break down below 78-78.5 renders downside targets towards the mid-70s and possibly as low as the Mar/Apr 2008 lows at 71.05-71.21. 19
  • 21. EURO/USD – Intermediate-term Outlook Chart source: Reuters Bridge as of 4 January 2013. 1.43 1.10 50% = 1.21 10-week ma = 1.2980 30-week ma = 1.2750 Neckline Support = 1.1643-1.1880 61.8% = 1.12 10-mo ma = 1.2821 30-mo ma = 1.3411 76.4% = 1.01 Head and shoulders top or symmetrical triangle?Violation of 2001 uptrend near 1.2628 which also coincided with the Jan 2012 low has resulted a sharp decline towards 1.2045 or close to the 50% retracement from 2000/2001 lows to 2008high. The ability to maintain support here during Jul 2012 prevented a deeper sell off. This promptly lead to a technical oversold rally that appears to be encountering near-term resistancealong 1.33-1.35 coinciding with the Feb/Mar/Apr 2012 highs as well as the 30-month ma and the 50% retracement from 2011-2012 decline. If buying increases EURUSD can retest its Dec 2012high (potential left shoulder) and 61.8% retracement from 2011-2012 decline at 1.3668-1.3835. Major longer-term resistance resides along 1.43-1.45 or the top of its 2008 and 2009downtrend channels. Note a large head/shoulders top formation still warns of longer-term structural weakness. Violation of 1.2628-1.2746 can quickly evolve into another downturn to1.2045-1.2291 or the Jun/Jul 2012 lows and possibly to 1.1643-1.1880 coinciding with the 2004/2005/2010 lows (neckline support). Violation here confirms a bearish 8-year head/shoulders topand opens the door for a decline to the 61.8% retracement from 200-2008 rally, the bottom of 2008 and 2011 downtrend channels at 1.11-1.14. Under severe selling, EURUSD can approachpar value (1.00) which also coincides with the 76.4% retracement from 2000-2008 rally at 1.01. 20
  • 22. Commodities – Goldman Sachs Commodity Index Chart source: Reuters Bridge as of 4 January 2013. 762 Breakout > 685-700  762 and 895-905 690 600 Head and Shoulders Bottom? 556 10-week ma = 640 30-week ma = 644 10-month ma = 644 30-month ma = 647Goldman Sachs Commodity Index broke out of a major multi-year technical base in early 2004. This breakout confirms a structural bull trend that led to a an all-time highof 893.86 on Jul 2008. From this peak a broad bear market decline triggered a sharp decline as the Commodities Index fell to a low of 307.84 on Dec 2008. Since thenthe GS Commodity Index has been trying to rebuild its technical base as evident by a large symmetrical triangle dating back to 2008. The coiling pattern nearing its apexand the convergence of key moving averages suggest an inflection point. The top of triangle is declining around 685 and the bottom of triangle is rising along 600providing respective key resistance and key support. In addition, since 2011 a potential head and shoulders bottom formation may be taking shape. Left shoulders arevisible along 573 and 613. Head appears near the 2012 low at 556. Left shoulder is also evident taking shape near 622. Neckline resistance resides around 685. 21
  • 23. COMEX Gold – Intermediate and Long-term Outlook Chart source: Reuters Bridge as of 4 January 2013. Breakout > 1804  2075 Pennant/Flag Pattern? 38.2% = 1449 50% = 1302 61.8% = 1256 1625 1525-1535 10-month ma = 1,663 Breakdown < 1525  1250 30-month ma = 1,385 10-week ma = 1,660 30-week ma = 1,703 10-week ma = 1,698 30-week ma = 1,680 10-month ma = 1,669 Resistance = 1804/1918-1924/ 2100-2150/2300-2400 30-month ma = 1,581 Support = 1700-1720/1650-1670/1575-1610/1524-1543Despite a volatile trading period over the past year, Gold still retains its longer-term structural bull trend as evident by the ability of this precious metal to maintain aboveits 2008 internal uptrend (1,600). It is also constructive that it is still trading above its 30-month moving average (1,581) as well as retaining its 38.2% retracement (1,449)from the 2008-2011 rally. Violation of this key support zone opens the door for a deeper and more extensive correction towards the 50%-61.8% retracement of its 2008-2011 rally or to 1,302-1,256. On a near-term basis, Gold is approaching its Aug 2012 breakout area around 1,625. The ability to hold onto this level can stabilize therecent strong selling pressure and allow for a rally to initial resistance at 1,700-1,725. The Nov 2011 and Feb/Sep 2012 highs at 1,790-1,804 remains pivotal resistance.Breakout here renders upside to 1,923.70 or a retest of the 2011 record highs and then to 2,075-2,100. On the other hand, failure to breakout reinforce the trading rangefrom last year between 1,525 and 1,804. A potentially large bullish Pennant/Flag pattern dating back to 2008 bottom bodes well for the longer-term technical outlookand still hints of targets to as high as 3,042 is possible over time if speculation occurs. 22
  • 24. Crude Oil – Light Sweet Chart source: Reuters Bridge as of 4 January 2013. 105.5 95 110.5 85 79.5 74.5 39 10-week ma = 88 30-week ma = 90 10-month ma = 91 30-month ma = 93The strong selling last year subsided as Crude Oil found crucial support near the mid-70s coinciding with the Aug/Oct 2011 lows (75.71/74.95) and the mid-point of its monthly linearregression band (74.5). However, Crude Oil remains confined to a trading range trend as defined by two symmetrical triangle patterns – one dating back to 2012 and the other to 2009/2011.Both of these triangle patterns will likely provide key near-to-intermediate support and resistance levels. The top of the larger triangle at 105.5 offers key intermediate term resistance and thebottom at 79.5 provides key intermediate term support. Also note this intermediate term range corresponds closely to the top and middle of the monthly linear regression band at 110.5 and74.5, respectively. On a near-term basis, violation of initial support at 85 +/- 1 or the bottom of 2012 symmetrical triangle opens the door for a decline towards 74.5-79.5. Breakdown hereconfirms a major top and suggests downside targets to 67-71 or the 2010/2011 lows and then to 50-56 or 2006/2007 lows. Longer-term support remains along the bottom of its monthly linearregression band and 1998 uptrend at 39-41. On the upside a breakout above initial resistance at 95-100 or the top of 2012 triangle and the Sep 2012 high renders a retest of 106.5-110.5.Above this supply zone confirms a major breakout and suggests upside to 130 or the Sep 2008 high and possibly to 144-147 to retest the Jun/Jul 2008 record highs. 23
  • 25. Fixed Income – US 10-Year Treasury Yields vs. 30-Year Yields Chart source: Reuters Bridge as of 4 January 2013. 10-Year Yields remains in a 30-year secular 30-Year Yields also remains in a 30-year downtrend downtrend (disinflationary). Although we expect channel as defined by 4.32% on the upside and 1.75- 10-Year Yields to fall to the bottom of its monthly 2.13% on downside. 30-Year Yields is now nearing regression band and long-term downtrend at 1.0- the middle of its channel at 3.23%. 1.02% a recent counter trend rally may result in a retest of the middle of its band at 2.39%. 10-month ma = 1.68% 10-month ma = 2.83% 30-month ma = 2.31% 30-month ma = 3.45% Inflationary Inflationary Disinflationary Top of Band = 3.76% Middle of Band = 2.39% Disinflationary Bottom of Band = 1.02% Top of Band = 4.32% Middle of Band = 3.23% Bottom of Band = 2.13% Bottom of regression band at 1.02% Bottom of downtrend channel = 1.0% Deflationary Bottom of regression band = 2.13% Bottom of downtrend channel = 1.75% Deflationary 24
  • 26. Fixed Income – US 10-Year Treasury - Intermediate Chart source: Reuters Bridge as of 4 January 2013. TNX has now broken above its recent 1.55%-1.89% trading range. This breakout suggests a retest of key initial resistance at 2.05-2.15%. 4.0%-4.35% 3.5%-3.75% 3.00%-3.20% 2.75% 2.4-2.5% 2.06-2.15% 10-week ma = 1.69% 2.04% 1.89% 30-week ma = 1.67% Short term range  1.39-1.55% and 2.05-2.15% 1.70% 10-month ma = 1.68% Intermediate range 1.0% and 2.4--2.75% 1.55% 30-month ma = 2.31% Longer-term range  0.5% and 3.5-4.0% 1.39-1.44% 1.0%The longer-term downtrend in rates will likely persist for a while longer as evident by the 4-year symmetrical triangle breakdown below 2.5% during Jul/Aug 2011. Thisbreakdown suggests downside target to as low a 0.5%, long-term. In addition, a technical break below 1.85% during May 2012 also suggests downside to 1.00-1.15%.Although rates can fall further the recent breakout above the top of a 5-month trading range at 1.89% or the Aug/Sep/Oct/Dec 2012 highs as well as a larger 3-year fallingwedge breakout warn of a counter trend rally to 2.06%-2.15% or the Apr 2012 downside gap and the 61.8% retracement (2.01%) of the Mar-Jul 2012 decline. The abilityto clear above 2.15% may extend the rally to as high as 2.4-2.5% corresponding to the Oct 2011/Mar 2012 highs, mid-2011 technical breakdown level, middle of the long-term linear regression band, and the 30-month ma. Initial support is now evident along 1.65-1.70%. Secondary support also coincides with the 2012 lows at 1.39-1.55%. 25
  • 27. Fixed Income – Spreads between 10 and 2-Year Yields Chart source: Reuters Bridge as of 4 January 2013. Mar 2010 = 2.822 Sep 1992 = 2.575 Jul 2003 = 2.675 Jan 2011 = 2.818 10 -2 year yield spreads is headed for a 2.358-2.548 retest of key resistance at 1.877-2.005. 1.877-2.005 1.463 Jan 2013 = 1.640 1.255-1.356 Historical Yield Spread = 75-100 bp Mar 1990 = -0.005 Nov 2006 = -0.15 Mar 1989 = -0.402 Mar 2000 = -0.474Although the 10-2 year spread can still return to its historical norm of 75-100bp possibly as early as this year a technical oversold rally has developed thatmay result in spread widening over the near-term to intermediate-term. We suspect the recent rally signals a retest of key initial resistance at 1.877-2.005. Failure to breakout here may lead to another contraction in spreads back towards initial support along 1.463. Key secondary support remainsevident at 1.255-1.356 or the 2008/2012 lows. Violation here opens the door for spreads to contract back towards its historical yield spread of 75-100 BP. 26
  • 28. Fixed Income – Spreads between 30 and 10-Year Yields Chart source: Reuters Bridge as of 4 January 2013. Oct 2010 = 1.383 30-10 year yield spreads continues to diverge from 10-2 year yield Jan 2011 = 1.201 spreads. Now testing key near-term resistance at 1.195-1.201. Aug 2011 = 1.377 Apr 2012 = 1.195 Sep 1992 = 1.028 Oct 2002 = 1.099 Jan 2013 = 1.214 .984 .90 .691-.748 Historical Yield Spread = 40-55 bp Jun 1990 = -0.040 Feb 2006 = -0.42Mar 1989 = -0.181 May 2000 = -0.260There still remains a large discrepancy between the 30-10 year yield spreads and the 10-2-year yield spreads. The 10-2 spreads contracted between Apr-Jul 2012 but hasnow begun to expand again. It is now attempting to breakout of a well established near-term trading range between .984 or the Nov 2011 low (downside) and 1.195-1.201 or Jan/Jun 2011/Apr 2012 highs (upside). A convincing breakout above 1.195-1.201 may signal the start of spread widening allowing for a possible retest of the2010/2011 highs at 1.377-1.383. May/Jul 2012 lows at 1.078-1.087 is initial support. Additional secondary support is 1.028-1.099 or Sep 1992/Oct 2002 highs. Violation ofNov 2011 low of .984 opens the door for a decline towards .90 and possibly as low as .691-.748. The historical normal spread for the 30-10 yields remains along 40-55bp. 27
  • 29. US Stock Market Cycle and US Business/Economic Cycle Source: UBS WMR, as of 4 January 2013. Stock Market Top Business Cycle PeakStock Market cycle tends tolead the Business Cycle by Business Cycle3-6 months window Late Bull Stock Market Cycle Early Bear Middle Recession Middle Bull Middle Bear Middle Recovery Early Bull Late Bear Stock Market Bottom Business Cycle Trough 28
  • 30. US Economic/Business Cycle, Sector Rotation & Duration Source: UBS WMR, as of 4 January 2013. Early Expansion – 12 to18 months Early Middle Late Early Late  Inflation = Continue to fall Expansion Expansion Expansion Contraction Contraction  Interest Rates = Bottoming out Middle Expansion – 12 to18 months  Inflation = Bottoming out Energy  Interest Rates = Rising modestly Basic Consumer Late Expansion – 12 to18 months Materials Staples  Inflation = Rising Capital Goods  Interest Rates = Rising rapidly Utilities Early Contraction – 6 to 9 months Services  Inflation = Rising less strongly Financials  Interest Rates = Peaking Technology Deep Contraction – 6 to 9 months  Inflation = Flat to Declining Consumer Cyclicals  Interest Rates = Falling Transportation 1 complete cycle – 48 to 72 monthsMarch 2009 2012-2013 2014-2015? or 4 to 6 years 29
  • 31. S&P 500 Sectors – Current Market Capitalization Chart source: Reuters Bridge as of 4 January 2013. Technology remains the largest and most influential sector by market cap weighing (19.0%) followed by Financials (15.7%). The top 2 sectors comprised nearly 34.7% of the overall SPX. The next 5 S&P 500 Sectors (i.e., Healthcare, Consumer Discretionary, Energy, Consumer Staples, and Industrials) accounts for another 55.2% of the SPX. Since SPX is a market cap weighted index the largest and most influential sectors can influence the overall direction of the index. Nonetheless, note the striking improvements taking place in the Adjusted Relative Strength trends for S&P Financials, Industrials, Basic Materials and Consumer Discretionary. Not only are they all trading above 100 but they are also showing signs of accelerating to the upside as evident by the % Distance from their Moving Averages. 30
  • 32. S&P 500 Sectors – Rotation from Oct 2002 – Oct 2007 Chart source: Reuters Bridge as of 4 January 2013. Commodities based sectors including Materials and economically sensitive sectors such as Industrials and Capital Goods led during the prior cyclical bull rally (2002-2007). It is interesting to note the relative strengths of Materials, Technology and Industrials increased dramatically toward the final year of the 2002-2007 cyclical bull run. Leaders Materials Technology Industrials Laggards Consumer Discretionary Financials 31
  • 33. S&P 500 Sectors – Rotation from Oct 2002 – Oct 2007 Chart source: Reuters Bridge as of 4 January 2013. During the prior cyclical bull rally from 2002-2007 leadership were concentrated heavily within natural resource intensive sectors including Energy and Infrastructure industries such as Utilities. As can be expected, classic defensive related sectors including Consumer Staples, Healthcare and Communications all severely underperformed their economically sensitive counterparts. Leaders Energy Utilities Laggards Communications Consumer Staples Healthcare 32
  • 34. S&P 500 Sectors – Rotation from March 6, 2009 low Chart source: Reuters Bridge as of 4 January 2013. From March 2009 bottom, most of the economically sensitive S&P sectors such as Consumer Discretionary, Industrials and Technology continue to trade above 100 indicating the 3+ year cyclical bull rally can still sustain further. However, the cyclical bull trend is maturing as evident by the mixed relative strength readings of Materials, Industrials, and recently Technology. Nonetheless, two large market cap weighted S&P sectors including Consumer Discretionary and Financials continue to show strong relative strength trends. It is interesting to point out that towards the latter stage of the 2002-2007 cyclical bull rally the severely depressed Technology sector suddenly and dramatically outperformed its peers into the final year of the 5-year cyclical bull rally. Is the recent strength coming from the much maligned Financial sector also alerting us to a similar scenario? Consumer Discretionary Financials Industrials Technology Materials 33
  • 35. S&P 500 Sectors – Rotation from March 6, 2009 low Chart source: Reuters Bridge as of 4 January 2013. Healthcare Consumer Staples Energy Communications Utilities Defensive sectors such as Utilities, Healthcare, Communications and Consumer Staples tend to relatively outperform the market during the latter stages of an economic expansion/recovery cycle. From the Mar/Apr 2012 lows many of these defensive S&P sectors appear to be signaling the start of a major rotation. However, these trends soon reversed directions into the end of last year. Are investors selling income and defensive related sectors in anticipation of one final explosive rally before the Mar 2009 cyclical bull rally finally comes to an end? 34
  • 36. S&P 500 Sectors – Materials and Consumer Discretionary Chart source: Reuters Bridge as of 4 January 2013. A large coiling or symmetrical triangle The S&P Consumer Discretionary sector remains intact. The ability to clear above retains its market leadership role as the top of this triangle at 240-243 is evident by the 3+ year uptrend channel technically significant as this confirms and advancing relative strength trend. A the triangle breakout. However, the recent successful test of its 30-week ma relative strength also trend needs to suggests a rally back to the top of its reverse direction and trend higher to uptrend channel. Profit taking can help to signal a sustainable rally. alleviate an overbought condition allowing for higher prices. 35
  • 37. S&P 500 Sectors – Consumer Staples and Telecom Services Chart source: Reuters Bridge as of 4 January 2013. S&P Consumer Staples retains its 3-year S&P Telecom Services has outperformed the uptrend channel. However, recent failure to market for the better part of last year (2012). surpass the top of its 2009 uptrend channel However, a false breakout above the top of its coupled with a flat relative strength trend warn 3+ year uptrend channel during Sep 2012 of a consolidation phase and opens the suddenly reversed direction as the relative possibility for another retest of the bottom of strength trend also declined. Does this then its 2009 uptrend channel near 340. suggest a trading range trend between 140-160? 36
  • 38. S&P 500 Sectors – Energy and Financials Chart source: Reuters Bridge as of 4 January 2013. A large symmetrical triangle or coiling pattern After a dramatic 84.6% decline from dating back to 2008 remains intact. A positive 2007-2009 S&P Financials sector has outside week suggests another attempt to been confined to a trading range over breakout above 570 +/- 5. Key support rises to the past 3 years via a potential head 470-475 or the bottom of the triangle. and shoulders bottom pattern. Improving relative strength and rising 30-week moving average are technically constructive. A move above neckline resistance at 230-235 confirms a breakout and sustainable intermediate term recovery. Left and right shoulders at 180 offer key support. 37
  • 39. S&P 500 Sectors – Healthcare and Technology Chart source: Reuters Bridge as of 4 January 2013. A major price breakout earlier last year suggests the emergence of a new leadership sector. Recent pullback to key support along its 30-week moving average is taking place on the backdrop of rising relative strength. This suggests that this is a normal correction within a sustainable rising uptrend. Clearing above the top of its 2009 uptrend confirms an accelerated uptrend breakout. Late last year S&P Technology successfully defended crucial support residing near its 3+ year uptrend channel, Jan 2012 breakout, and Jun 2012 low. The ability to find support here can lead to another rally back to its 2012 highs at 504-510. Although the intermediate-to-longer term technical outlook remains favorable, the weak relative strength trend hints of a lost of leadership, at least from a near- term perspective. 38
  • 40. S&P 500 Sectors – Utilities and Industrials Chart source: Reuters Bridge as of 4 January 2013. Failure of S&P Utilities to clear above the top of its 2009 uptrend channel during mid-2012 has promptly led to another pullback to the bottom of its 3- year uptrend channel. The ability to maintain this uptrend helps to stabilize the recent strong selling. However, the weak relative strength readings strongly indicate lack of investment interests and hence another round of base building or sideways trading. A move above 330 confirms a symmetrical triangle breakout. This breakout coupled with a positive outside week pattern suggest the emergence of the S&P 500 Industrials as a new leadership sector. A retest of 2007/2008 record highs of 356-381 is possible. Key initial support is 310-313 and then 285-295. 39
  • 41. SPX versus MSCI Emerging Market Index Chart source: Reuters Bridge as of 4 January 2013. Head and Shoulders top It appears that the 2010 Head/Shoulders top downside target has been achieved as the MSCI Emerging Markets has recently bounced from its internal trend line dating back to 2000 along the low-90s. Does this then suggest the possibility of a recovery towards 100, near-term and then to 106-113, intermediate-term? Breakdown 99 40
  • 42. SPX versus Emerging/Developing Countries Chart source: Reuters Bridge as of 4 January 2013. Since the credit/real estate/financial crisis many of the emerging market as well as developed markets have weakened as evident by the declines in the monthly relative strengths of foreign equities in relationship to US equities (SPX). We suspect global investors are concerned about geopolitical/macro tail risks and hence the relative outperformance from SPX in recent years. Although near-to-intermediate term picture have weakened the longer-term structural technical outlooks for many of the emerging/developing equity markets still remain favorable. Does this then suggest global investors will again return to emerging/developing equities? Russia = 2,001 Brazil = 669 India = 529 EM = 288 China = 140 EAFE = 95 Japan = 58 41
  • 43. SPX Versus MS Multi-national Index – Nifty-Fifty II Stocks Chart source: Reuters Bridge as of 4 January 2013. MS Multi-national Index (NFT) or US Mega Cap stocks/Nifty Fifty II stocks have dramatically underperformed SPX from 2009-2011 before staging a recovery from the lows of summer 2011. However, the recent setback is now threatening to break a key support coinciding with the extension of the 2006 neckline (dash line). This action may signal an investment shift away from Multinational US Mega Cap stocks (Nifty-Fifty II stocks) and back towards SPX. On the other hand, a successful test of this crucial support may lead to another MS Multi-national Index rally. Trend 3 Breakout 109-110 105-106 101 100-101 Breakdown Trend 1 Trend 2 42
  • 44. Mid-Cap Stock Outperformance Chart source: Reuters Bridge as of 4 January 2013. S&P Mid-cap 400 Index (MID) or Mid Cap stocks has outperformed S&P 500 Index or Large Cap stocks since 1999 bottom trading to a relative strength high of 212 on March 2011. This outperformance cycle has since weakened as MID underperformed SPX in what appears to a broad global shift towards large-caps (SPX). So is this the end of the outperformance cycle for Mid-cap versus Large-cap? Not necessarily, as there appears to be similar periods of brief underperformances from MID in relationship to SPX during 2002-2003, 2006-2007, 2008-2009 and the current March 2011 to present cycle. Since the primary trend remains up we believe this is a corrective phase within a structural bull trend suggesting MID will soon regain its outperformance trend against SPX . 203 MID outperforms SPX MID underperforms SPX 43
  • 45. Growth style investing over Value style investing continues Chart source: Reuters Bridge as of 4 January 2013. This relative strength chart shows the relative performance of S&P 500 Growth and S&P 500 Value since the mid-1990s. Growth has outperformed Value since 2007. A large pennant/flag formation breakout during 2011 led a brief outperformance cycle favoring Growth style investing over Value style investing. However, over the past year (2012) it appears a consolidation phase has developed. This consolidation is approaching a crucial stage as it is now back to its prior 2011 breakout level. Value outperformed Growth during the Tech/Telecom bubble decline A large 2+ year pennant/flag formation breakout late during 2011 confirms Growth Growth outperformed over Value investing. However, a 121 Value during the consolidation has developed during 2012. Tech/Telecom Boom Growth Breakdown led to Value outperforms Value outperforming Growth soon after the global Financial bubble burst 44
  • 46. Dividend yields do matter – However… Chart source: Reuters Bridge as of 4 January 2013. SPX yields appears to be nearing crucial resistance at 2.0% corresponding to a potential right shoulder of a multi-year head and shoulders top pattern dating back to early 2000s. In the past, when SPX yields have risen dramatically this has subsequently led to SPX price corrections. In contrast, when SPX yields have fallen precipitously this has ignited SPX price rallies. SPX Yields rising SPX Yields declining 2000-2009 2009-2011 SPX Yields testing major resistance? 1.93% SPX Yields declining Yields rising  1994-2000 market correction Yields falling  market rally Since 1970s nearly 43% In a structural trading range market, dividends of SPX total returns came may play an increasingly pivotal role as Yields flat  from dividend yields. investors seek total return investments. trading range 45
  • 47. DisclaimerWealth Management Research is published by Wealth Management & Swiss Bank and Wealth Management Americas, Business Divisions of UBS AG (UBS) or an affiliatethereof. In certain countries UBS AG is referred to as UBS SA. This publication is for your information only and is not intended as an offer, or a solicitation of an offer, tobuy or sell any investment or other specific product. The analysis contained herein does not constitute a personal recommendation or take into account the particularinvestment objectives, investment strategies, financial situation and needs of any specific recipient. It is based on numerous assumptions. Different assumptions couldresult in materially different results. We recommend that you obtain financial and/or tax advice as to the implications (including tax) of investing in the manner describedor in any of the products mentioned herein. Certain services and products are subject to legal restrictions and cannot be offered worldwide on an unrestricted basisand/or may not be eligible for sale to all investors. All information and opinions expressed in this document were obtained from sources believed to be reliable and ingood faith, but no representation or warranty, express or implied, is made as to its accuracy or completeness (other than disclosures relating to UBS and its affiliates). Allinformation and opinions as well as any prices indicated are currently only as of the date of this report, and are subject to change without notice. Opinions expressedherein may differ or be contrary to those expressed by other business areas or divisions of UBS as a result of using different assumptions and/or criteria. At any time UBSAG and other companies in the UBS group (or employees thereof) may have a long or short position, or deal as principal or agent, in relevant securities or provideadvisory or other services to the issuer of relevant securities or to a company connected with an issuer. Some investments may not be readily realizable since the marketin the securities is illiquid and therefore valuing the investment and identifying the risk to which you are exposed may be difficult to quantify. UBS relies on informationbarriers to control the flow of information contained in one or more areas within UBS, into other areas, units, divisions or affiliates of UBS. Futures and options trading isconsidered risky. Past performance of an investment is no guarantee for its future performance. Some investments may be subject to sudden and large falls in value andon realization you may receive back less than you invested or may be required to pay more. Changes in FX rates may have an adverse effect on the price, value or incomeof an investment. This document may not be reproduced or copies circulated without prior authority of UBS or a subsidiary of UBS. UBS expressly prohibits thedistribution and transfer of this document to third parties for any reason. UBS will not be liable for any claims or lawsuits from any third parties arising from the use ordistribution of this document. This report is for distribution only under such circumstances as may be permitted by applicable law.Distributed to US persons by UBS Financial Services Inc., a subsidiary of UBS AG. UBS Securities LLC is a subsidiary of UBS AG and an affiliate of UBS Financial Services Inc.UBS Financial Services Inc. accepts responsibility for the content of a report prepared by a non-US affiliate when it distributes reports to US persons. All transactions by aUS person in the securities mentioned in this report should be effected through a US-registered broker dealer affiliated with UBS, and not through a non-US affiliate. Thecontents of this report have not been and will not be approved by any securities or investment authority in the United States or elsewhere.Version as per October 2011.© 2013. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved 46
  • 48. Contact InformationPeter LeeUBS Financial Services Inc.peter.lee@ubs.com212-713-8888 Ext 01UBS Financial ServicesWealth Management ResearchNY, NY 10019www.ubs.com 47

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