UBS technical analysts Michael Riesner and Marc Müller make some grim predictions for the stock market in their latest weekly market commentary.
Riesner and Müller write that the continued outperformance of U.S. stocks versus the rest of the world does not seem sustainable.
From their note:
Last week we highlighted the increasing divergences on the inter-market side between the still resilient SPX and the weak picture in Asian markets, underperforming cyclical sectors, declining inflation expectations, and the intact bull trend in the US dollar. All this finally results in a major divergence forming in the SPX versus the MSCI World, which was not able to break its May 2011 reaction high.
Last week we said that pressure in the financial system is building. If we are correct then it is very likely that this pressure will unfold in a short and sharp correction and the most likely timeframe for this move/event will be later Q3 and/or Q4.
They think 1325 is an especially important level to watch on the S&P 500, saying that if the index breaks below that level, the next stop could be somewhere in the 1100s:
As long as 1325 holds, the SPX theoretically still has the chance for another extension towards 1390, but given the increasingly vulnerable position of the broader market (Russell-2000 has broken its June uptrend at 780) and an unchanged negative picture in cyclicals we would use strength to sell. A break of 1325 in the SPX would suggest that the US market has started a new bigger down leg into later Q3 and/or into Q4, which remains our preferred timing for the next major tactical buying opportunity. From a price perspective we continue to see the risk of a correction below 1200 into Q4.
And Riesner and Müller think the VIX is flashing a confirmation signal:
Last week the VIX index again hit its major support zone at 15. It is the level where in the last 40 years several bull markets and prominent rallies have topped out…so regardless of any short-term bounces, into later Q3 and into Q4 we expect to see higher volatility; and given the current market constellation we thing the likelihood is high that if we see another significant correction, the move will just be very short but sharp.