In their 2012 Technical Analysis outlook, UBS, the Swiss bank that seems the most desirous of a helping hand from any and every printing-press manufacturer in the world, sees both a major cyclical bottom forming in 2012 based on a confluence of cycles as well as a very timely long-term sell-signal based on one of its proprietary models. We assume that the downside (based on their composite sell signal which triggered last May and has a 10-13 month lag to cycle lows) they see in equity market, as the Juglar and Kitchin cycles trough together, drives Central Banks to finally flip the switch and save the world (in nominal terms) around mid-year. In the meantime, we will see QE3-based disconnects ebb and flow day after day as volumes wax and wane from panic (buying or selling) to vacuous - where rallies should be faded and not chased. Combine these two charts with their views on cycle lows in election years, years ending with a '2', and decennial cycles and it appears technically we are all set for a tumultuous year.
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On their TT-New Composite Indicator (above) sell-signal, UBS notes:
After generating a sell signal in overbought territory this indicator usually moves down the full range into oversold territory before generating a new buy signal and marking the beginning of the next cyclical bull market. In this case we are talking here about a monthly indicator, which means moving down the full indicator range usually takes a few months. The minimum downside to expect is a 10 to 13 months decline from the top.
Last May we got our sell signal, which is just another confirmation that the October low last year would be way too early from just a time perspective. The more important finding is that with a 10 to 13 month correction pattern we would land exactly in summer 2012, which is the low projection we are getting from our cycle work.
Another key message is that even if we should see any kind of temporary positive surprise in the S&P-500 into later Q1, we would see this as a potential false break or bull trap and therefore wouldn’t chase the market!!
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And somewhat cataclysmically, on the troughing of Juglar, Kitchin, and Decennial cycles:
The question is of course how much of a correction we see on the way into this low? The problem is that in H1 2012 both the Juglar and the Kitchin cycle (chart above) are moving down simultaneously and translated it means that particularly in these timeframes we have a negative surprise in risk assets setup developing.
The last two examples where both cycles went down hand-in-hand were 2008 and 2001. In 2004 and into 2005, the Kitchin cycle was also negative but given the bullish background of the Juglar cycle, the market effectively just went sideways before starting the next and final bull wave into 2007/2008, where both cycles moved into their bust phase.
UBS Conclusion:
We expect this year another bearish spike in sentiment but on the back of this it is maybe more realistic to expect only a first and limited bull cycle into 2013 before we could see another cyclical bear to complete the whole secular bear around 2014, which would finally mean that this market is going nowhere in the next 2 to 3 years.
The only chance for this picture to change is, in our view, with a macro environment where we get an external shock on the inflation side, so that in the next 2 years inflation gets out of control, where in nominal terms equities would do quite well but in real terms we nonetheless would all lose money.
Source: UBS