Pundit's Perspectives – Tue 12 Jan, 2016
Major Bear Market Coming In 2016: UBS Technical Analysis
The time frame on the analysis below fits right into how I am thinking the rest of this year will play out for the markets and commodities.
Batten down the hatches, because a Perfect Storm is coming to global stock markets, at least according to the technical analysis team at UBS. A new report from UBS analysts Michael Riesner and Marc Müller highlights that all of the charts (and stars) are aligning, and nearly all are pointing to a major bear market in stocks worldwide in 2016.
Riesner and Müller explain their perspective in the introduction to their December 5th report: “The 2011 bear market in commodities and Emerging Markets continues to filter through into the Western world. In May 2015, the MSCI World topped out and a lot of markets globally have fallen into a bear market. The large cap-driven US indices (SPX, NDX, DJI) as well as Japan and European small and mid-caps are the last men standing. In 2016, we expect these markets to top out also and fall into a full size bear market, which we expect to last into worst case early 2017.”
It is worth noting that the UBS technical team was spot on last year with their call for increased financial market volatility in 2015.
Technical signs point to a major bear market
The UBS analysts undertake a brief Elliott Wave analysis, and suggest that after last summer’s wave 4 correction, the SPX is now trading in a wave 5 of a larger degree, further extending the 7-year cycle. Given that a lot of global markets are already in a bear market, and since the October low in a countertrend rally, they argue the SPX is now trading in the “late stages of its 4th longest and 5th strongest cyclical bull market since 1900.”
In terms of specific numbers, Riesner and Müller suggest after the weak start in trading for the year, there is a good chance of a bounce in late Q1 towards 2200 or even 2300 in the S&P 500 index. That said, considering the increasing selectivity/volatility globally, and the fact that the eight-year cycle of a presidential turn has a notably negative track record, expect the S&P index to top out in the second quarter, and begin “a full size bear market, with risk of a 20% to 30% correction into minimum later 2016 and worst case early 2017.”
The analysts also argue that the March 2009 SPX bottom was actually the start of a new secular bull market. They argue this means a 2016/2017 bear market is really the first cyclical bear dip, and the underlying secular bull market will resume from there into the end of the decade.
In Europe, Riesner and Müller see the STOXX-600 and the Euro Stoxx-50 moving into major breakout patterns. They elaborate by saying: “Into Q1, we can still see selective overshooting but with most of Europe having topped out in summer 2015, and small and mid-caps (as one of the global boom themes of the last few years) moving into a major top, we expect Europe to negatively surprise and start another significant bear cycle in Q2 2016.”
The U.S. dollar, however, remains, a very important macroeconomic variable to be considered. The UBS technical team called the major US dollar bottom in 2014, and they argue this bull market wil kep running into late 2016/early 2017. They anticipate that the U.S. dollar will retrench in the first quarter before launching a new bull move in the second half of the year. Riesner and Müller emphasize that the “key message is the US Dollar is on the way into a major top, which suggests the AUD and other pairs moving into a multi-year buying opportunity.”
The UBS technical team has also been bullish on the Nikkei-225 stock index since 2012, but now say the summer of 2016 will be the time to sell Japanese stocks. They argue the Nikkei is trading in wave 5 and are calling for a top in the Japanese markets some time this summer, then a short but sharp cyclical bear market int early 2017 before it also resumes a secular bull market trend into the end of the decade.
In hindsight it is clear that 2011 was a secular top for commodities and emerging markets. Riesner and Müller argue the the 2011 bear market is maturing and approaching the final act. They suggest we will see a bear market rally in commodities/oil, EMs, and high yields, before a final strong capitulation in late 2016 or early 2017. At that point, they see “commodities and EMs as moving into a multi-year buying opportunity.”
Bull market in gold brewing
Finally, the UBS analysts point out that gold has been stuck in a cyclical bear market since mid-2011. They therefore argue that old and gold miners are now moving towards an 8-year cycle bottom, which is likely to serve as the basis for the next multi-year bull market. This means that gold could move up this year as a safe haven, and by 2017, gold could enjoy tailwinds from the U.S. dollar topping out and beginning a long move down.