These diverging trends point to a market correction, says UBS...
Riesner: 15%-20% correction this summer likely
 Everett Collection
Divergence is a problem.
A UBS analyst joins a chorus of technical experts who see the U.S. stock market in the process of hitting a top and expect a major correction this summer.
Michael Riesner, head equity technical analyst at UBS, in a note to investors presents a number of charts to support his ‘toppish’ warnings.
The S&P 500 is about 1% below its all-time high set last month, but what’s worrying Riesner is what he describes as “intact and growing divergences on macro and inter-market levels.”
In simpler terms, Riesner is working about the divergence between the S&P 500 and high-yield bonds, 10-year Treasury yields and inflation expectations.
The chart below depicts the divergence between the S&P 500 returns SPX, -0.70% and widely used high-yield exchange-traded fund iShares iBoxx $ High Yield Corporate Bond HYG, -0.37% over the past decade.
 FactSet
Riesner’s prediction of a correction would have been accurate more than a year ago, since that is when divergences started. But the fact that they continued and grew is worrisome. Here’s a look at the S&P 500 compared with the 10-year Treasury yield TMUBMUSD10Y, +0.84% which should be moving in the same direction but have been diverging lately.
 FactSet
Riesner also talks about market breadth, which is diminishing as prices continue to climb. This is what Riesner means by so-called market breadth:
“Since May last year we see fewer stocks hitting new highs and fewer stocks trading above their 200-day moving average, which mirrors increasing selectivity, as evidence of a maturing bull cycle and leading indicator for an important top,” he wrote.
Apart from the divergences represented above, Riesner points to corrections/divergences in utilities XLU, -0.89% and transports DJT, -0.41% the volatility known as Vix VIX, +7.24% bottoming in July 2104, rising volatility in the euro-dollar pair EURUSD, +0.0799% performance of cyclicals and defensive sectors, semiconductors and housing.
Riesner’s conclusion: a major correction is likely to occur this summer, but surviving that, the bull market will continue to march higher next year with a target for first half of 2016 at 2400-2500.
“Strategically we expect the market moving into an important early summer top followed by a 15% to 20% correction into Q3 before starting another tactical bull cycle into H1 2016.
The main point of the note, perhaps, is that the best antidote for a market that is “toppish” is a correction....
ttp://www.marketwatch.com/story/these-diverging-trends-point-to-a-market-correction-says-ubs-2015-06-11 |
