Technical Outlook 2014 Global - · PDF file · 2014-01-08Technical Outlook 2014...

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Technical Analysis Technical Outlook 2014 Global

Michael Riesner Marc Müller 07/01/2014 [email protected] [email protected] +41-44-239 1676 +41-44-239 1789

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The Late Stages of a Cyclical Bull Market The 2012 summer bottom was the basis of a new cyclical bull market in risk assets. Tactically, the break of our last year’s early August top projection in the S&P-500 was the trigger for extending the March 2009 bull market, which in the meantime, is one of the longest and strongest cyclical bull markets since 1900. With extreme investor bullishness and increasing selectivity, we have evidence that this bull market is maturing. This year we expect to see the classic final fireworks of a bull market since from a cyclical perspective, we anticipate the S&P-500 to move into a 7-year cycle peak in H2 2014 as the basis for a cyclical bear market into first half 2015. Here are our key calls for 2014!

From a cyclical perspective the break of last year’s August top was the trigger for a high momentum breakout in global equities, which from an Elliott wave standpoint represents a classic wave 3. In this context we expect the underlying bull trend in global equities to continue but given last year’s high momentum trends we expect this year to be more volatile with further increasing selectivity. 2014 should be a year for stock pickers!

In our 2013 strategy we said that according to the presidential cycle we have a 73% likelihood to see a bull market top and a subsequent bear cycle in 2013/2014. The extension of the March 2009 bull market does not offset the underlying force of this cycle. In 2014, and in combination with the presidential cycle, we expect the US market to move into an idealized 7-year cycle peak as the basis for a cyclical bear market into first half 2015.

Tactically, we expect a weak start into 2014 with the risk of a 5% to 10% correction into a deeper Q1 bottom as the basis for the last tactical buying opportunity and final bull wave into summer. We would see a potential summer top as only the start of a multi-month distribution process, as the set up for a cyclical bear market into first half 2015, as the next major long-term buying opportunity for equities.

On track with our long-term cycles, the JPY has started a multi-year bear market in 2012. The JPY reversal was the anticipated regime change for Japan and the basis of a new secular bull market in Japanese equities. No bull market is one way! The Nikkei and the USDJPY are trading in an Elliott wave 5, which suggests Japan/USDJPY moving into a cyclical bull market top in H1 2014 as the basis for a corrective bear cycle into H1 2015.

In summer 2013 the US dollar failed to break its July 2012 4-year cycle peak, which means the DXY is trading in an intact bear cycle. Apart from a Q1 rebound we see the US dollar still bearish-biased in H1 but following our cyclical models we expect the DXY moving into a long-term cycle bottom in H2 (which implies a major 2014 top in the EUR ) as the basis for a new US dollar bull market into the 2015/2016 time frame. At least in H1, a bearish US dollar (more EUR and CHF strength) implies headwind for European equities relative to the US.

Gold trades in a maturing cyclical bear market as part of a still intact secular bull market. Via a major low projection in the AUDUSD in early Q1 we expect gold/gold mines to start a comeback/corrective bear market rally from early Q1 into minimum Q3 and best case H1 2015. A bear market rally in the AUDUSD also implies a comeback of commodities, related sector themes, and Emerging Markets from deeper Q1 into H2 2014.

2013 was a brilliant year for small and mid caps. In 2014 we expect small and mid caps to start underperforming, which on the other hand implies selective and final overshoots in large cap indices/themes. On the sector front we expect late cyclical themes to outperform with a comeback of energy stocks and tactical outperformance of the mining sector into H2 2014. Technology, the darling of the current bull market, is an overshooting candidate but moving into a big top. In Q2 2013 we saw our anticipated outperformance top in defensives. In H1 we expect further underperformance in healthcare/staples, but a potential H2 overall market top implies a comeback of defensives and the start of an outperformance phase from H2 2014 into H1 2015.

Summer 2012 represents the top of a 31-year lasting secular bull market in US bonds. After the anticipated move higher in yields last year we expect further rising yields into summer 2014. However, by anticipating a top in risk we expect bonds to move into an important cycle bottom as the basis for a bear market rally into H1 2015.

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The Extension of the 2012 Bull Cycle in Risk … In our 2012 strategy, we anticipated a major summer bottom for risk assets (serving as a set up for a major bond top), and according to our cyclical model we said this risk bottom should be the basis for a new selective cyclical bull market for equities into minimum H2 2013 or best case 2014. The rationale behind this cyclical projection was and still is a combination of different cycles, mainly the presidential cycle and the 7-year cycle in the US. Last year we had a high conviction call in our tactical timing and this was that H1 should be underlying bullish for equities and we had an August top projection for the S&P-500. So last year we said that if we were to see an important market top in 2013, the most likely timing for this top was August. In July/August the S&P-500 reached our projected 2013 target at 1670 and in Europe the DAX reached our 8300 target projection. However, after just a shallow correction we got in early September another breakout in the S&P-500 and a major and high momentum breakout in Europe and the MSCI World. This breakout was the trigger for a U-turn in our tactical strategy as well as in our big picture view. Cyclically, the break of the August top gave us the indication that, apart from short-term minor pull backs, equities should remain bullish biased until at least end December/early January before we could see the next bigger correction. In the bigger picture, the break of last year’s August top and the following high momentum bull trend implied that the whole bull market would very likely extend into minimum summer 2014.

2013 was a rather selective year for risk assets with a big breakdown in correlations in H1. Although we have been explicitly bullish for Japan, which was the top performer in 2013, and the STOXX-600 has more or less exactly reached our 2013 target at 320, at the end of the day we clearly underestimated the targets and the power of the bull cycle in the US market. 1840 in the S&P-500 and 9700 in the DAX-30 were definitely not our calls for last year. On the inter-market side, the bear market in gold and the meltdown in gold mines and the overall weakness in commodities was also a big negative surprise.

More importantly, at least for the US, last year’s extension of the 2009 cyclical bull market has also consequences for the secular structure of the US market, since from a pure technical perspective the breakout in the S&P-500 above the 2007 high is too significant to justify a still intact secular bear market. However, we are sticking to our last year’s key call, that at the latest in 2014 we should see the March 2009 bull market moving into a major top

followed by a cyclical bear market. It should be the first cyclical bear in a new secular bull market, which is confirmed by a new buy signal in the 30-year cycle and a confirmed secular trend change in commodities and bonds. From a cross asset class perspective it confirms that the new mega trend, the great rotation from bonds and commodities into equities, has definitely started last year. In 2014 and 2015 we expect an interruption of this new mega trend!

S&P-500 … One of the longest/strongest bull markets since 1900! Whereas in the rest of the world we saw selective cyclical bear markets in 2011, 2012 and last year, we never had a correction larger than 20% (objective definition of a bear cycle) in the S&P-500 since the March 2009 bottom. This effectively means that the 2009 cyclical bull market is per definition still intact and the statistical facts behind this bull market are intriguing. The March 2009 bull market represents the 22nd bull cycle since 1900. With the month of December, this bull market is in its 57th month, which is the 6th longest bull cycle and with a performance of 154% (closing December 31st) it is the 5th strongest bull cycle since 1900 (see chart 2./3. - full statistics please see chart 87.). The world is not a one way street so sooner or later every bull market will come to an end, even in a financial world that is obviously ruled by central banks. Corrections and bear markets have prompted central banks to act in the past and so it will also be in the future with markets that provoke reactions from central banks. From an Elliot wave perspective and with last years early September’s breakout, the MSCI World is trading in a classic impulsive wave 3, which represents the highest momentum of a bull market. This implies that apart from a significant tactical correction (wave 4), which we

Chart 1. ) MSCI World and S&P-500 Daily Chart

Source: UBS Technical Research



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expect to see very early in Q1, this bull market will continue, since a final wave 5 and a distribution top building phase would be minimum missing to complete a major bull cycle, which means this bull is very likely to further extend in price and time. Furthermore, with last year’s obvious and high momentum breakout this bull market is now also undergoing a very classic behavioristic pattern. Last year we said that investors are still overinvested in defensive/safe assets. Fear was still a

major factor in the markets and in this context we expected more selling of the former safe assets versus buying/chasing riskier assets in H1. With the increasing trend momentum in equities in H2, investors’ fear disappeared and the acceptance of the bull market has been growing, at least among institutional investors where we could measure extreme sentiment readings in late December. What is in our view still missing in this bull market is the final “buying panic” of the retail investor, accompanied by selective overshooting/bubbles as the classic firework that we usually see at the end of bull markets. The higher this bull market goes, the more likely are increasing discussions about “asset bubbles” that will put the pressure on central banks to hike rates and the Fed to taper more significantly and maybe faster than anticipated. If so – it will be headwind for risk in later 2014.

S&P-500 on the way into a 7-year cycle peak!! In our 2013 strategy we highlighted the presidential cycle and we said that with post-election and mid-term years the US market is moving into the more challenging part of this cycle. Again, since 1941 we have had 18 presidential cycles. In 13 out of 18 cycles we saw a bear market in either the post-election or the mid-term year, which means from a purely statistical standpoint we have a 72% likelihood of seeing a bear market (correction larger than 20%) in this timeframe. In H1 last year, the increasing selectivity, the growing number of divergences in our indicator work, and the divergences between the markets/regions as well as the breakdown in market correlations were objective signs and warning signals to anticipate a top. Cyclically, the break of the August cycle top has negated a potential top in 2013 and it was the trigger

Chart 2. ) Strongest Bull Markets Since 1900


Chart 3. ) Longest Bull Markets Since 1900


Chart 4. ) S&P-500 with 7-Year Cycle


Chart 5. ) Election Cycle (1941 – 2010)




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for extending the March 2009 bull cycle. However, we do not think that this extension offsets the whole cycle. On the contrary; last year we said that on the back of the presidential cycle there is the risk of moving into a bull market top in 2013/2014, and if we combine the presidential cycle with the 7-year cycle we effectively have in 2014 an idealized 7-year cycle peak projection for the US market. The last peaks in the 7-year cycle were in 2007, 2000 and 1994. More importantly, since the 1937 peak (excluding the 1929/1932 meltdown) the average decline from a 7-year cycle peak was -34%!!! It is interesting to see that this number is more or less in line with the average decline of -37% in the 22 cyclical bear markets since 1900 (full statistics see chart 87.).

Looking at the market sentiment, which is hitting extreme levels in the historical context, and looking at the exhaustive trend momentum (early stages of a parabolic chart in the Nasdaq Composite and high momentum wave 3 bull cycles in Russell-2000 and a record high overbought German Mid Cap DAX), we have clear signs that this bull market is on the way into its ultimate end game. 2013 was a high

momentum trend year in the US. 2014 we expect to get much more volatile so we think the best momentum of this bull market is already behind us. However, as long as we do not see clear signs of distribution and a bigger price top forming it is too early to get bearish. Obviously, we can be wrong on our tactical timing, so that a potential bull market top could even shift into very early 2015; but our call is that, a) we expect the US market to be on the way into a 7-year cycle peak, and b) the subsequent bear market should be significant with a potential decline between 20% and 30%. According to the decennial cycle years ending in “5” have usually a very bullish background, which suggests a bear low either in H2 2014 or at the latest in H1 2015. More importantly, the average performance of the last 22 cyclical bull markets since 1900 was 132%.

Macro correlations … the return of normality! The great challenge/difficulty in H1 2013 was to play and understand the breakdown in correlations on the macros side, the divergence between the various regions, and the abnormal performance trends on the sector front, and on top of this to correctly interpret all this in terms of where we stay in the bigger picture. On the equity side, to be bullish S&P-500 and the Nikkei-225 from day one in 2013 was exactly the right decision. The problem was that from day two on into the late June risk bottom we had a 20% bear market move in Emerging Markets. The BOVESPA corrected 30% from the second trading day into late June and after the impulsive Q1 rally, the Shanghai Composite retested its December bottom into summer. In Europe, the Euro Stoxx was -2% and in the periphery we had Spain and Italy underwater at around -15% before starting the big H2 bull cycle. Even in the Swiss market, 2013 wasn’t that easy to play. On the back of the massive overshooting in defensive/bond proxy stocks, the SMI had a jumpstart into the year and was with +23% one of the star performer markets in Q2. In May we said that given the exhaustive overshooting in healthcare and food stocks we would expect minimum a multi-month correction in these over hyped and over-owned sectors, so that the Swiss Market could

have already seen its top of the year in May, which in fact was the case with the consequence that the Swiss Market Index was one of the great underperformers in H2 2013.

On the macro side the picture was not less diverse. Whereas the S&P-500 was in a high momentum bull-run, in H1 we saw a breakdown in the AUDUSD/risk correlation. The USD rallied into summer - the direct consequence of weak commodities, a melt down in inflation expectations (see chart 8.) and gold breaking down. On top of this we saw on the sector front defensives going through the roof, whereas most cyclicals continued to underperform into Q2. All this did not really feel bullish from a macro and inter-market perspective, and it was one of the reasons besides our cyclical model why we saw the risk of moving into a potential bigger top in August. However, apart from the continued breakdown in the AUDUSD/risk correlation,

Chart 6. )


Chart 7. ) S&P-500 versus AUDUSD Weekly Chart




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since the July low in risk, the picture on the correlation side has changed significantly. In July, the US dollar topped out, commodities (copper) and inflation expectations hit an important bottom, which was also the bottom for Emerging Markets. And last but not least, in H2 we saw a broad-based outperformance trend of cyclical sectors globally, whereas the Q1 star performers - healthcare, food, and in the US the utilities sector, started to underperform aggressively. All this fits better to a classic bull market and this suggests that from a trend perspective we are more or less back to normal, which makes it definitely easier to see where we are in terms on the overriding risk cycle.

Bear market rally of gold and commodities in 2014 What does all this mean for 2014? From a macro perspective (and apart from a potential early Q1 tactical risk

off phase) we expect the US dollar to stay in a bear cycle into H2, which suggests that the underlying bull trend for risk should remain intact. Having said that, what is still missing for a perfect risk on scenario is strength in the Australian Dollar. In our 2013 strategy we highlighted the huge triangle pattern and the key support at 0.97 in the AUDUSD as a strategic support level and reality check for risk in general and in particular for a potential final overshooting scenario in commodities. It was one of our 2013 key calls to expect a comeback of late cyclicals and commodities as a classic late cycle outperformance theme, which was obviously not a really good call given the continued weakness of commodities.

On the one hand, with the breakdown in the AUDUSD we have another piece of evidence that the secular top in commodities is in place (see page 16.), which is structurally bearish. However, tactically we think the AUDUSD is trading in a wave 5 of a larger degree, and in this context we see the AUDUSD moving into an important cyclical bottom in Q1 as the basis for a corrective but longer lasting and significant rebound/bear market rally into minimum H2 2014. If we are correct with this call it would imply a cyclical comeback/bear market rally of commodities and related sectors/themes, which implies an important low in gold and oil in Q1, which would also mean that we could see a temporary positive surprise in Emerging Markets from a Q1 tactical low into H2. So at the end of the day the whole comeback story in late cyclical themes and commodities is in our view just postponed. Intellectually, it fits the extension of the underlying 2012 bull market in risk but as a reality check it would also give us the ultimate confirmation that we have in fact reached the late stages of this bull market.

Furthermore, and this could be a key point on the macro side in 2014, a comeback in commodities implies also a comeback of at least inflation expectations in later 2014. So apart from a tactical bounce in Q1, we expect the pressure on the bond market to remain high into summer, where we could see the US 10-Year Treasury yield moving towards 3.70% and testing its 1994 long-term down trend! Further rising yields we expect to sooner or later start biting risk/equities. 2013 was the year where bad economic news was good news for equities in terms of liquidity. 2014 could be the other way around, where good news on the economic front and a comeback of commodities and inflation into summer will be finally bad news for equities because the liquidity cycle tops out on the back of central banks getting more hawkish than mostly anticipated.

Chart 8. ) US Inflation Expectations with S&P-500 and CCI Index


Chart 9. ) AUDUSD versus Gold




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Tactically still room for overshooting into summer!! What can we expect in terms of tactics in 2014? One of the very obvious points is the extreme bullishness with which investors are starting into the new trading year. In December we highlighted the extreme readings in sentiment and said this will be a burden for the market in Q1. The bearish consensus of the Investor Intelligence hit a multi-decade low and with the year end rally the Bullish Consensus has hit 61%, which is the threshold for market euphoria. Pattern-wise the H2 2013 bull cycle resulted in broad based high momentum trends in a lot of markets/segments such as the Nasdaq Composite or the MSCI World (chart 11.), which from an Elliott wave perspective represents a classic wave 3. On the back of the extreme sentiment we have a high conviction call, and this is to see the risk of a significant correction (wave 4) in early Q1 as a kind of sentiment wash out. No bull market tops out with a high momentum top such as the current top in the MSCI World and in this context we would still expect something to be missing on the upside after a potential Q1 correction. From a price perspective, a Q1 correction could be around 7% but together with a major low in the AUDUSD we would see this as the last major tactical buying opportunity for equities and start the last move higher (wave 5) into a potential summer top to complete this bull market.

What are our targets for the S&P-500? A classic phenomenon we usually see in the late stages of a bull market small and mid caps starting to underperform, which on the other hand still leaves the door open to see selective overshooting, in large cap indices. On a monthly closing basis we expect the Nasdaq Composite to hit a new all time high in summer, which will be another cornerstone in the sentiment overshoot this year and before starting a significant correction into 2015. Into summer we expect the S&P-500 to reach a zone of 1920 to 1970 before starting a multi-month distribution phase (chart 12.).

Within a potential bear market we anticipate a correction of around 20% to 30%, which would still be below average to what we have seen in past declines from a 7-year cycle peak. Why do we expect a below average decline? It is vey likely that any kind of more significant correction and/or a bear cycle will again prompt central banks to act and start with another round of QE or unprecedented measures. As we said in March 2009, where we expected a new major bull cycle to start as well as in 2012 when we anticipated another important bottom for risk – you can like this reflex or not but it is a reality that central banks will do everything to avoid any kind of deflationary shock or major breakdowns in the financial system. At the end of the day we think this policy will lead to a dead end and this is one reason why we think that gold is currently “only” in a kind of 1975/1976 style cyclical bear market as part of a still intact secular bull market. What would a 20% to 30% correction in the S&P-500 imply for the secular structure of the US market? A 20% correction from around 1970 would represent more or less a pullback to the 2007 peak, which from a technical perspective would confirm last year’s breakout and in this context 2015 should bring us another important buying opportunity for equities and following the decennial cycle, where years ending in 5 usually have a very bullish background.

Chart 10. ) Nasdaq Composite Monthly Chart


Chart 11. ) S&P-500 with Investor Intelligence Bullish Consensus




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Where’s the risk to be wrong in our 2014 outlook? The US market is overbought on all time frames, in our indictor work we have non confirmations forming on all time frames, the market sentiment is hitting extreme levels, the selectivity is increasing and in the outperformer markets/themes we see charts taking a more and more parabolic shape. All this we see as evidence that the US market is on the way into an important top, which from a cyclical perspective we expect to be a 7-year cycle peak. Looking at our cyclical model and taking into account market patterns we see the most likely timing for a major top in later Q2 and/or a deeper summer top followed by a several months lasting distribution before starting the real correction into later 2014 and into H1 2015 as our preferred timing for an important market bottom. Where could we be wrong in our 2014 outlook?

Although we don’t think so but we can be obviously wrong in our thesis that the US market moves into a major top followed by a cyclical- and therefore a real bear market. Nonetheless, in one point we are very sure, and this is to see minimum one significant and longer lasting correction in 2014 and this potential correction should be very likely stronger than any pull back or correction we have seen last year. Again, given the increasing selectivity and the extreme bullishness it is unlikely to see in 2014 the same kind of bull trends that we have seen last year and alone this view implies that 2014 will be much more volatile and difficult year than 2013.

One risk to be wrong is always the timing of a potential top/bottom. From a pattern/wave standpoint we have relatively high conviction that in the bigger picture we see in 2014 wave 4 and wave 5 developing, which should complete a bull structure of a larger degree. From a tactical standpoint we also have high conviction that we see correction wave 4 in H1. However, if this correction gets a more complex shape it means that following bull wave 5 starts later and this would obviously also shift a potential top more into later 2014 if not even into early 2015 followed by a bear cycle. This scenario would stay in conflict with the decennial cycle where years ending in “5” usually have a very bullish character. On the other hand we have to say that so far this decade is unusually strong versus the decennial pattern where usually the first 3 to 4 years of a decade have a rather flattish if not even negative character before moving into a much more bullish second half of the decade.

The third risk would be exactly the other way around and we see an early top, which means that our anticipated early Q1 correction would be already the beginning of a bear cycle. It is in our view unlikely since a lot of the classic themes/signals we usually see ahead of major market tops are still missing. Neither in the US nor in Europe we have currently any kind of distributive top formation forming, which usually takes several months. Yes, we have an increasing selectivity in the US and in Europe but what is missing is the classic underperformance of small and mid caps that we usually see prior to a bull market top. This is a central part of our 2014 strategy but so far this is clearly missing or at least just starting in the US and this stays in a direct line with the final point, where we still do not have any of the classic divergences between early cyclical sectors (transport, banks and semiconductors) versus the overall market and versus late cyclical plays. Conclusion: If we are wrong than it is in our view more likely that a bull market top comes in later than we favor.

Chart 11. ) MSCI World Weekly Chart


Chart 12. ) S&P-500 Daily Chart




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A cyclical roadmap for 2014 … As our regular readers know, in our yearly outlook report we traditionally discuss the relevant seasonal cycles of the presidential cycles and/or the decennial cycle as part of our cyclical model to get an idea of what kind of roadmap we can expect for the year ahead. The presidential and the decennial cycle are representing just one part of our 5 factor composite cyclical model. From 2010 to 2012 we had in our cyclical model a very consistent picture and we in fact had in these 3 years a very high correlation between the theoretical roadmap versus what we effectively got in the markets (chart 13.). Our major 2012 summer bottom projection for risk is just one example. Another example is our Q2 2011 top projection for risk and in particularly for commodities as well as the Q3 2011 major top projection for gold.

Last year we said in our strategy report that for 2013 we had some inconsistencies in our model, i.e., we did not believe in a Q1 correction, which both the presidential cycle and the decennial cycle implied. So the only high conviction call we had last year was an August top projection, where we said that if we were to see an important market top in risk in 2013, it would very likely be in August. On track with our cycles we had in fact a top in early August but this top was broken already in early September, which analytically negates a major top and triggers a new cyclical buy signal. This in consequences was the reason for us to make a U-turn in our tactical strategy, where we said a bigger correction in H2 would be no more likely so that, apart from any tactical minor pull backs, equities should remain bullish biased into minimum late December/early January as our next bigger tactical top projection.

This year we have unfortunately a very similar setup. Both the presidential and the decennial cycle are giving us different indications, and if we add the normal seasonal cycle as well as our Fibonacci cycles the picture gets even more complex/inconsistent. The seasonal chart for mid-term years gives us an early Q2 top projection followed by a volatile correction pattern into a major early October bottom. In the decennial cycle it is more or less the other way around. Here we get a top indication very early in January followed by a longer lasting correction phase into June before a new bull phase starts into year-end. In the normal seasonal cycle of a trading year we get a pullback indication in January, and bullish from January into August before correcting into October as the basis for a Q4 rally into year-end.

Conclusion: For 2014 we have again an inconsistent picture in our cyclical model, and the conflict is, as last year, between the seasonal cycles and our static time cycle versus Fibonacci cycles. Apart from our high conviction call to see the US market moving into a 7-year cycle peak - from a tactical aspect 2014 will again be a relatively low conviction year for us in terms of seasonal cycles. If we look at the correlation of the last 12 months we can say that last year we had the highest correlation to the decennial cycle. Besides a potential Q1 correction scenario we actually had a relatively high correlation throughout the rest of the year. If this correlation continues to stay high, we would get a very early January top, followed by a several

Chart 13. ) Dow Jones Industrials Decennial Cycle (1900 – 2012)


Chart 14. ) MSCI World Daily Chart




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months lasting correction into summer. We in fact have a tactical top very early in January on the radar screen but a longer lasting correction into summer stands in stark contrast to our cyclical projection of an important summer top projection, which we get from our statistical cycles for a couple of other markets. Furthermore, with regards to our Fibonacci cycles we are getting an important turning point for June 2014, which is just another indication for an important top projection in later Q2. Having said that, one similarity we have in both of the above seasonal charts and its is that in 2014 we have a high likelihood of seeing a several months lasting correction, which is actually not a big surprise given the extreme market sentiment and the overbought readings of our monthly indicator work. So if we put everything together our call for a 2014 roadmap is to expect a very early January top followed by a significant tactical correction into deeper Q1 as the basis for another broad based rally into summer, where we expect an important top, preferable in May/June as the beginning of a volatile distribution phase before starting a potential bear cycle into H1 2015.

The return of the bulls and complacency … We have several times highlighted and discussed the market sentiment in late November and December, which in the historical context has hit extreme levels. In late November we said that we see this extreme bullishness as a burden for Q1. During our anticipated first half December pullback the sentiment got even more bullish, which is a sentiment anomaly and a clear warning signal. In late December the Bullish Consensus has reached pure contrarian level with 61% in the Investor Intelligence (see chart 11.) and 55% in the AAII survey. Together with our indicator work forming a

bearish divergence in the S&P-500 on a weekly and daily basis we have a tactical high conviction call for 2014 and this is to see an early January top followed by a more significant Q1 correction.

The key question is how to read the extreme sentiment readings in the bigger context and at which point do we get evidence that our anticipated major market peak is underway/forming? First of all, it is important to understand that there is a big difference between survey driven sentiment indicators and flow driven sentiment studies. Only when both groups tell us the same story we in fact get a contrarian indication and a consistent picture as to what to expect in the market. From a sentiment standpoint we are starting into 2014 with the NAAIM money manager survey at extreme levels.

Chart 15. ) Dow Jones Industrials Seasonal Chart Mid-Term Years


Chart 16. ) Dow Jones Industrials Seasonal Chart Years Ending in “4”


Chart 17. ) S&P-500 with Investor Intelligence Bearish Consensus




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The Investor Intelligence Bearish Consensus is at a multi-decade low. On the flow side the Margin Debt at the NYSE has hit a new all-time high and the long-term 50-day CBOE Put/Call ratio is at extreme low readings, which all in all shows a consistent picture that investors are staring with an extremely bullish bias and a lot of complacency into this year. From a pure statistical standpoint we can say that in each time the market started with a bullish consensus above 55% into a new year we had a high likelihood to see a more challenging year including significant corrections or being more or less flat such as in 2011 (18% correction) or in 2006, 2005 and 2004.

With regards to the current extreme sentiment we can furthermore highlight the NYSE ARMS index. This study is actually a flow driven breadth indicator but because it incorporates volume, it is to a certain point also a sentiment study. We all know that when we have panic selling in the market this causes extreme volume spikes and therefore also significant spikes in the ARMS index (such as in 2010 and 2011). The rationale is that extreme volume suggests extreme sentiment and extreme sentiment is a contrarian indication! However, apart from the mega spikes in the ARMS index as a contrarian buy indicator we can use this indicator also as a contrarian study when hitting extreme low readings and forming non-confirmations since almost all major market peaks over the last 40 years have been led by a significant and several months lasting divergence in this indicator!!

Extreme bullishness but a sentiment top looks different!! When we have a major top forming, we usually see the momentum slowing on all fronts, which brings us the classic

non-confirmations in more or less all indicator groups. In a distributive top building phase we usually see the market sentiment eroding several months prior to the ultimate top, which results in divergences in sentiment studies. We see the same on the flow side, where the buying power is effectively eroding or on the other hand, the selling pressure is latently increasing; the rationale behind this phenomenon is very simple. On the way into major market tops, market breadth usually starts to deteriorate months prior to the ultimate top, and we primarily have early cyclicals and small and mid caps losing momentum and topping out earlier. It is the latent selling pressure coming from exactly these stocks and sectors that we can see in the eroding sentiment studies and volume related indicators. If so, it is a warning signal that we are on the way into a more important market peak.

Chart 18. ) S&P-500 with AAII Bullish Consensus


Chart 19. ) S&P-500 with 50-Day CBOE Put/Call Ratio


Chart 20. ) S&P-500 with 50-Day NYSE ARMS Index




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Conclusion: In November /December we had extreme readings in our sentiment studies and the NYSE 50-Day ARMS index reached the danger zone where we usually have the risk to see significant tactical corrections. However, what we still do not have in place is any kind of bigger non-confirmation in any of these studies. A sentiment top in the bigger picture looks different! The extreme sentiment with which we are starting into 2014 suggests the risk of a significant correction and tactical negative surprise in early Q1; but it is in our view still months too early for calling a major top.

Furthermore, earlier in this report we said (See page 3.) that with last year’s high momentum bull cycle in H2, we are now in a phase where we see the market undergoing a very classic behavioristic pattern. Over the last two years investors were too conservative, they were overinvested in defensive/safe assets, and fear was a major factor in the markets. This has changed dramatically in H2. More or less all “safe assets” were sold off last year. Gold underwent a 30% bear market. We saw significant losses in safe haven currencies (Norwegian and Swedish Krone), and since April/May, the former hype sectors staples, healthcare, utilities - and in Europe the personal sector are underperforming. Nonetheless, the end game on the sentiment side in this bull market is in our view still missing. We think that the positioning in the defensive plays is still too high and we haven’t seen the real capitulation/selling and switching into more risky stocks. With the increasing trend momentum, investors’ fears disappeared and acceptance of the bull market has been growing, at least among institutional investors. What is still missing is the classic “buying panic” of the retail investor, which has not yet really participated in this bull market. In this context we think the selective overshooting/bubbles and the classic fireworks that we usually see at the end of bull markets is still missing. The technology sector with its social network stocks is just one example where we currently have a déjà vu to the 1999/2000 period as we see more and more parabolic charts developing, which suggests a) the opportunity to see more overshooting into a potential summer top but b) we expect technology to move into an important top in 2014 followed by a significant bear market into 2015!

Rising selectivity … a classic late cycle phenomena As we have said in our 2013 strategy, the most important phenomenon we see in the mature stages of a bull market is increasing selectivity. What does this mean? In the late stages of a bull market and this is usually the 10% in terms of performance, we usually see market breadth deteriorating. We see fewer stocks making new highs, we see fewer stocks trading above their 200-day moving average and prior to important market peaks we also usually see small and mid caps and therefore the broader market underperforming, mirroring the deteriorating market breadth. Another important point are the bigger non-confirmations between key sectors and the large cap indices, where it’s mostly

the early cyclicals such as semiconductors and transport that are topping out earlier than the major headline indices, and where via the large cap outperformance we can still see the one or other surprise on the upside. We reiterate the statistics we highlighted in our 2013 strategy. Looking at key indicators such as the number of new 52-week highs at the NYSE, it is amazing to see that since the 1932 bottom, 16 out of 18 major market peaks (89% probability) were led by a bigger bearish divergence forming over a longer timeframe (with a 10-week moving average overlay. So in the end phase of a bull market we see fewer and fewer stocks participating and pushing the market into its ultimate top. The only exception were the peaks in 1980 and 1983, where the

Chart 21. ) S&P-500 with NYSE new 52-Wek Highs (10-week moving average)




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market topped out without forming such a non-confirmation (chart 21.). So where do we stay in terms of market breadth? Since last year we have a bigger non-confirmation forming in the NYSE new 52-week highs. In a global context this is important, since the US market was and still is factually the great outperformer market against a globally increasing selectivity, where fewer equity markets have hit new highs (chart 23.) and fewer equity markets globally are trading above their 200-day moving average. Last year we said that with regards to the new 52-week highs in the US we have to make a big difference between the a strategic non-confirmation in market breadth as just an early warning indicator (chart 21.) and the ultimate tactical divergence (chart 22.), which in early 2013 was still not on place. This has changed since Q2 last year. Last May we had the ultimate tactical top in the NYSE new 52-week highs where the hyped defensive bond proxy sectors (healthcare, utilities and staples) topped out. So since the May top we have every new S&P-500 high confirmed by fewer stocks; also, fewer stocks in S&P-500 are trading above their 200-day moving average, so the selectivity in the US is definitely increasing, which is an objective warning signal to see at least a bigger tactical correction. The question is why, together with the extreme sentiment and our early January top projection, we do not see the risk of a major market top, which other technical analysts already anticipate for Q1?

Small and mid caps a reality check for market breadth!! In H2 last year we said that a non-confirmation in new 52-week highs is one thing but we must always analyze why we

have a deteriorating number of new highs and whether this really reflects deteriorating market breadth. Since the May top last year it was mainly the rotation from over-hyped and over-owned bond proxy sectors into cyclicals. So it was actually a healthy rotation that caused a continued divergence in our breadth indicators, whereas on the other hand we had small and mid caps still performing strongly in the US as well as in Europe. 2013 was generally a brilliant year for small and mid caps with an amazing trend momentum in the Russell-2000, the Mid Cap DAX in Germany and the Swiss Mid Cap Index. This stood clearly against a deteriorating breadth apart from the fact that in H2 2013 we had no real non-confirmation between the classic early cyclicals (transport/semiconductors).

Chart 22. ) S&P-500 with NYSE New 52-Week Highs


Chart 23. ) MSCI World with New 52-Week Highs


Chart 24. ) Russell-2000 Weekly Chart




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Conclusion: Yes – we do have non-confirmations in our breadth indicators and we have growing selectivity as a global phenomenon, which we see as part of a maturing bull market. However, what is still missing as a real warning indicator are the classic non-confirmations between small and mid caps versus large caps as well as divergences between key sectors, mostly early cyclicals (semiconductors, financials, transport) versus the S&P-500. Banks and broker stocks have been very strong in Q4. Most of the major US market peaks we saw the transport sector leading, which is one part of the classic Dow Theory. So far semiconductors and transport (see chart 25.) went hand in hand higher with the S&P-500 and this is definitely not how a major market top looks like!!

If we look at small and mid caps we can see that the Russell-2000 in the US is extremely overbought, with a near record extension to its 200-week moving average. In Europe, the German Mid Cap DAX is record high overbought. Although in these markets the ultimate bearish divergence in our indicator work is still missing, alone this point implies that it’s very likely to see a significant and longer lasting correction in small and mid caps in 2014.

In October we highlighted the break of the 2013 relative outperformance in the Russell-2000 versus the S&P-500, which seems to cement the Russell’s failure at its 2011 relative top as a key resistance. From a cyclical perspective, given the exhaustive momentum we saw in the Russell last year and sentiment-wise, we see the October relative reversal as an

important reversal. According to market surveys, portfolio managers globally are record bullish and expect further small and mid cap outperformance versus large caps. Given last year’s massive bull-run, and in light of the record high overbought position we see this as a contrarian indication and expect a negative surprise in small and mid caps and this also implies that 2014 gets even more selective and event driven such as 2013.

Seasonally, we usually see small and mid caps outperforming in Q1. It will be very interesting to see how the broader market behaves in this timeframe but we wouldn’t be surprised that at the latest after our anticipated Q1 tactical correction we see small and mid caps underperforming as well as bigger non confirmations forming between early cyclicals and the overall market. It would be the ultimate confirmation that the US market and equities in general have reached the end game of the current bull market.

Chart 25. ) German Mid Cap DAX Weekly Chart


Chart 26. ) Russell-2000 versus S&P-500


Chart 27. ) Dow Jones Transport versus S&P-500




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Market patterns … there is still something missing 2013 was the year where we saw a lot of impulsive bull runs of a larger degree in various markets. In Q1 2013 we had an impulsive bull run in the Nikkei-225 and in the JPYUSD. In H1 we saw a high momentum bull trend in the S&P-500 and after the break of the August top we also saw in Europe/MSCI World an impulsive bull run from early September into late December. As we have said earlier in this report (see page 6.), from an Elliott wave perspective a high momentum bull run represents an impulsive wave 3 of a larger degree, which brings us the highest readings in our indicator work as evidence of a high momentum top. After a wave 4 correction we get the last bull wave to complete a bull cycle of a larger degree and an objective tool to confirm a wave 5 are divergences in more or less all type of indicators as the leading indicator that we are on the way into an important market top.

Elliott wave 4 and wave 5 are still missing to complete a bull cycle So objectively seen, the 2013 bull run in global equities can be labeled as a wave 3, which from an analytical perspective implies that wave 4 and wave 5 are still missing to complete a bull cycle such as in the Nasdaq Composite (see chart 10.). Given the fact that we see a potential early Q1 tactical top in risk/equities as the top of wave 3, we think 2014 will be the year where we see a significant correction wave 4 and the final bull wave 5 to complete the underlying bull cycle and the impulsive structure that has been forming since the 2011/2012 bottoms. So from this standpoint alone we can say that 2014 could be a much more volatile and selective year than 2013, and it also means that with a potential January tactical top we have the best in terms of momentum and trend strength behind us.

In terms of conviction it is usually the hype themes and the darlings of the market where we see the highest momentum and the clearest patterns. It does not matter whether it’s the Russell-2000 and the Nasdaq Composite in the US or in Europe the German Mid Cap DAX, the Technology DAX or the European sector landscape. All these indices have in common that we have seen high momentum bull runs in H2 2013. In Europe we measure the number of sectors in the STOXX-600 Europe universe (including 20 sectors) that have an intact weekly MACD buy signal. Prior to important tops, we usually see a deteriorating number of sectors with an intact weekly MACD buy signal, which effectively builds a divergence versus the STOXX-600, while moving into its ultimate top. The late November top in Europe was a high momentum top without forming any bigger divergence in our indictor work, which implies that the whole multi-month process of deteriorating breadth and growing selectivity is still missing to confirm that a more important top is underway.

Chart 29. ) Europe STOXX-600


Chart 28. ) German Technology DAX Weekly Chart




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Conclusion: In H2 we have seen high momentum bull runs in US and European equities and it is no question that all these markets are overbought, which implies the risk of a correction in early Q1. However, no bull market ends with a high momentum top, so after a potential correction, we would minimum need to see one more bull leg as a potential wave 5, bringing us the non-confirmations and divergences in all types of indicators on the upper timeframes that we usually see prior to important tops. Furthermore, what is also still missing in the S&P-500 as well as in most other markets in Europe or the Nikkei-225 is any kind of bigger distributive pattern. It is the classic tug of war between bulls and bears that we describe as distribution with deteriorating market breadth and growing selectivity. Given the fact that we expect the S&P-500 to move into a 7-year cycle peak we

favor a multi-month distributive pattern forming. So if we are correct and we see a potential wave 5 market peak in summer, this could be actually just the beginning of a multi-month distribution process, where as a minimum a retest of a potential summer top in the outperformer markets and late cyclicals would still be in the cards, whereas the underperformer markets and early cyclical sectors are already on the way into a correction/bear cycle.

The Secular Structure in Equities is Turning Bullish! Over the last two years we have highlighted the 30-year cycle in equities, commodities, and the bond market. Our thesis was and still is that on the back of major flow cycles the secular turning points in all 3 asset classes are highly correlated to each other. Consequently, if we think we have seen the secular top in the US and European bond market (secular low in yields), we should also be very near to completing the 2000 secular bear market in equities and the 1999/2000 secular bull market in commodities. The rationale behind these ultra long-term cycles is obvious – after a more than 30-year lasting secular bull market in bonds the world is completely overinvested in bonds, whereas after a 12- to 13-year lasting secular bear market in equities and a 60% meltdown in NYSE market volume, the institutions and investors are pretty much underinvested in equities. In 2011 we already argued that the basis for a new secular bull in equities will be selling

bonds and selling commodities versus buying equities. From a cyclical perspective we saw this process starting gradually from the middle of this decade; and with last year’s turn in flows we have clear evidence that the great rotation has finally started. Does this mean that the secular trend change in all asset classes is behind us?

Cyclically, our long-term yearly momentum in the S&P-500 has reached lower historical extreme territory as evidence that the 30-year cycle is bottoming out, and together with looking at the high correlations/chart analogies to previous secular bear markets we have been saying since 2011 that we actually see the US market trading only in the end phase of its secular bear market.

Chart 30. ) S&P-500 Weekly Chart


Chart 31. ) Dow Jones Industrials Monthly Chart




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In this context, we choose for our last year’s strategy report the title “the endgame of a secular bear”. Within this endgame and as a leading market, we saw Japan breaking out into a new secular bull market. For the US market we highlighted volume patterns of past secular bear markets where we thought a final cyclical bear was still missing to confirm a low volume secular bear market bottom such as in 1932, 1942, and 1974. On the inter-market side, we highlighted a major wave 5 bull sequence in the commodity space completing in the CCI Index future as evidence that a major top in commodities is forming or already in place. In the bond market we thought and still think that the 2012 summer low in US yields represents the ultimate top of a 31-year lasting secular bull market. We saw all this as evidence that the US market is trading in the ultimate end phase of its secular bear market.

Last year we argued that tactically, we think one final cyclical bear market in the US and in Europe is still missing to complete the underlying secular bear structure. So on the one hand we said it’s almost certain to see the S&P-500 and in Europe the German DAX (which is a performance index) breaking out to new all-time highs in 2013; however, we did not believe in significant and impulsive breakouts since from a cyclical perspective we thought that at the latest this year we should see the US market and equities in general moving into a 7-year cycle peak as the basis for a final cyclical bear market. With reaching 1850, the S&P-500 has surpassed its 2007 all-time high by around 17%, which is a significant and powerful breakout. So what are the facts, where do we stay in the secular picture, and does this change the roadmap of our secular endgame scenario for equities?

Chart 32. ) S&P-500 Yearly Chart with 30/40-Year Cycle


Chart 33. ) Dow Jones Industrials versus CRB Commodity Index


Chart 34. ) US Long Bond Yield Yearly Chart


Chart 35. ) CCI Index Future (Equally Weighted)




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On the commodity side, we highlighted the wave 5 structure in the CCI index future (see chart 35.) in last year’s strategy as evidence that a secular top in commodities is forming. At the end of 2012 we were still not sure whether the Q2 top in 2011 already represented the top or if a final overshooting into 2013/2014 would finally bring us the secular top in commodities. Last year’s weakness in the commodity space (and in particularly the weakness in agricultural and soft commodities) goes too far to still justify and intact secular bull market and together with the breakdown in gold, the AUDUSD breaking its huge triangle formation to the down side, and the secular trend break in Emerging Markets (see chart 44.) outperformance versus the MSCI World, we have mounting evidence that the Q2 top in 2011 represents the secular top in the commodity space, which supports the thesis that at least in the US market we have seen a secular trend change as well.

Last year we highlighted a certain pattern in the volume behavior at previous secular bear market bottoms as evidence that a secular low in equities is in place. Top to low, in previous secular bear markets we saw the market volume decline 60% to 90% in absolute terms. Tactically, the fall into the final bottoms in 1932, 1942, and 1974 was accompanied by deteriorating volume as the mirror of the ultimate demise in equities, followed by increasing volume in the subsequent first cyclical bull market as evidence that a new secular bull market had started. The 2009 bottom in equities was a high volume low (panic selling), which does not fit the behavior of previous secular bear market bottoms. However, it’s fascinating to see that last year we got a trend reversal in absolute volume terms and this exactly after retracing 62% of the 1982/2007 secular bull trend in market volume. Last year’s volume reversal is the objective evidence that the great rotation from bonds into equities has started and it is indirectly the confirmation that the secular low in equities is in place.

If we look at the global equity landscape we currently still see a big difference between the US, Japan, Europe markets, and the rest of Asia and Emerging Markets. In the US we have a significant breakout in the DJI and SPX in place, and in Japan we have our anticipated and confirmed secular buy signal/trend change in place. Having said that, Emerging Markets are still trading in their multi-year sideways range. In Europe, only the German DAX broke its 2007 all-time high. All other key markets as well as the broader Stoxx-600 are still trading below to significantly below their relevant all-time highs from 2000 or 2007. In the European periphery we have seen on the one hand a 90% decline in the Greece stock market, which usually indicates that a bubble has been worked off and the market is clean for starting a new secular bull market. However, if we have really seen a housing bubble top in Spain in 2007 (which we think is not the question) it usually takes a lot more time to work off a bubble than just 5 to 6 years. With an idealized bubble composite chart (including several financial bubbles) we can clearly say that it usually takes some 10 to 15 years to work off a bubble before starting a new secular bull cycle. In this context it is interesting to see that in Asia we have a pretty high correlation between the Shanghai Composite with its 2007 bubble top and the aftermath of the Nikkei-225 bubble (see chart 39.). If this correlation continues to stay that high we would get another important top in China in later 2014 followed by another significant bear market into 2015 before a more important bull phase in China starts.

Chart 36. ) NYSE Volume 20-Week Moving Average


Chart 37. ) Europe STOXX-600 Monthly Chart




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Finally, with regards to the German DAX we already discussed in our last year’s strategy the difference between the performance DAX and the DAX price index. Last year we clearly said that with a dividend yield of around 3% the performance DAX will have a big problem in not breaking out and taking out its 2007 all-time high. The question was and is whether technically we can see this as the new secular breakout of the German stock market as a potential leader for Europe. Yes – we are living in a nominal world but given the fact that the DAX price index is still trading some 22% below its March 2000 all-time high we think it is too early to say the German market in trading in a new secular bull market, particularly if we take into account that we have 18 stocks in the DAX which are not confirming the significant breakout in the performance DAX.

Conclusion: The secular structure in global equities is diverse. In line with our 2012/2013 calls, Japan has started a new secular bull market. Although inflation-adjusted, the S&P-500 is still 9% below its 2000 peak, nominally a breakout of 18% above its previous high is too significant to justify a still-intact secular bear market. Together with the 30-year cycle in the S&P-500 bottoming out and getting confirmation from the relevant cycles in bonds and commodities, we have growing evidence that at least in Japan and the US a new secular bull market in equities has started; whereas in Europe, the rest of Asia, and Emerging Markets we think it is still too early to speak about a new secular bull market. What does this mean for the secular endgame scenario we have discussed over the last two years?

We continue to see the risk for the US market moving into a cyclical bull market top in 2014, followed by a cyclical bear market into H1 2015. In the larger context such a potential bear market would be the first cyclical bear market of a new secular bull market in the US and Japan, whereas in Europe this cyclical bear market could finally complete the complex 2000 secular bear market structure before we also see the FTSE-100, the Swiss Market Index, and other European key markets break out of a 15- to 17-year lasting sideways trading range.

What is an alternative scenario? The breakouts in Japan and in the US are a fact, and the breakout in the Dow Jones Industry has a similar impulsive character such as in 1982 or in 1915 (see chart 31.). However, after completing an impulsive bull structure we could easily see a multi-year complex correction pattern (similar to the a-b-c correction in the Dow Jones from the 1916 peak into finally 1921) before starting its next cyclical bull phase as part of the new underlying secular bull. Analytically, such a scenario would not touch the underlying new secular bull trend in the US and Japan. On the contrary, after a high momentum bull cycle such as in Japan last year it would be absolutely normal to even see a significant correction into 2015 and beyond but this would nonetheless just post another higher bottom versus the 2012 bottom as the next major cyclical buying opportunity within a new secular bull trend. In the US, such a scenario would be a corrective pattern on, historically seen, rather high price levels. In this pessimistic scenario Europe could remain stuck in its 2000 secular sideways trading range for another several years, which from a macro perspective can only be justified if Europe really slips into a latent deflationary scenario.

Chart 38. ) DAX-30 Performance versus Price Index


Chart 39. ) Shanghai Composite versus Nikkei-225 (1985 – 2008)




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US Dollar moving into a major 2014 cycle low!! On track with our models, the US Dollar hit an important long-term top in summer 2012, which from a cyclical perspective represents a 4-year cycle peak. In May/July 2013 we saw a marginal/temporary break of the 2012 peak but at the end of the day the DXY finally failed to break its July 2012 top, which a) makes the 84 to 84.50 area an even more important long-term/structural resistance level, and b) the failure confirms our 2012 4-year cycle peak projection, which means the US dollar is in an intact cyclical bear as long as it trades below last year’s top. Tactically, we anticipate a significant rebound in early Q1 (mirroring our Q1 set back scenario in equities/risk) but all in all we expect the dominant trend in the US dollar to remain down into minimum summer, and in line with our 2013 strategy we continue to see a retest of the 2011 lows at around 75. However, with regards to our cyclical models it is one of our 2014 key calls to expect the US dollar to move into a major bottom in H2, and we expect this bottom to be the basis for a significant US dollar bull market/cycle into finally 2016, which would obviously have consequences for other asset classes, not to mention that a potential bull move could be a game changer for the long-term technical structure for the US dollar.

Generally, from a cyclical aspect we have a 10-year cycle running in the US dollar (chart 40.). In the early 1980s we had a major US dollar bottom forming. In the first half of the 1990s there was another major dollar bottom forming and in 2000 the US dollar topped out and started a major bear market. The DXY is trading volatile sideways since more or less 2008, forming a huge triangle formation and a similar pattern to what we saw in the early 1990s. We expect our anticipated H2 2014 dollar bottom to be the basis for starting a significant breakout attempt on the upside; and a break of 84.50 would be the ultimate confirmation that a major dollar bull cycle is underway into our next 4-year cycle top projection in 2016. Keep in mind, structurally we already have a latent pressure towards a bullish US dollar via the break down in the JPY and the AUD. In 2013 it was more or less the weight of the EUR rebound that has pushed the trade weighted US dollar down. Tactically we expect the AUDUSD to hit an important low in Q1 and together with a USDJPY top projection in Q2 we have two further pairs pushing down the DXY into our anticipated H2 major bottom. The key pair this year will remain the EURUSD and with the EUR trade weighted index trading in a wave 5 of a larger degree we expect the EUR to move into a big top this year and it should be also the trigger for the DXY to hit an important cycle low in H2 2014. As we said earlier, from a cross-asset class perspective we have seen normalization on the correlation side since the July/August 2013 bottom in risk. So on the one hand, further tactical US dollar weakness in H1 should support our still bullish scenario for equities into summer, whereas we would see a potential major US dollar bottom in H2 as the framework and confirmation for moving into a major top in risk assets followed by a bear market into H1 2015.

Chart 40. ) Trade Weighted Dollar (DXY) Monthly Chart


Chart 41. ) Trade Weighted Dollar (DXY) Weekly Chart




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2014 … a year with significant reversals on the currency side 2013 was a year with some very aggressive trend moves on the currency side. The high momentum bull run in the USDJPY was certainly not the big surprise for us since it was one of our 2012/2013 key calls to expect a major JPY top as the start of a multi-year bear market and the trigger for a regime change in Japan. The surprise last year was the breakdown and the bearish momentum in the AUDUSD, and the breakdown in the AUDUSD/risk correlation. Apart from all other conclusions, one consequence of last year’s trend moves is that we have a strong consensus in the market for 2014 and this is very one-sided bearish for the JPY and AUD. After the high momentum bear trends in 2014 we have relatively clear patterns developing in the relevant JPY and AUD pairs and we see both the JPY and the AUD trading in wave 5 of an impulsive bear structure, which is actually the last bear wave of this cycle!

What does this mean for both currencies? From an Elliott wave perspective, completing a bearish wave 5 structure is in most cases long-term bearish and confirms that an underlying long-term bear market has started. However, after completing a wave 5 structure we usually see an important tactical bottom as the basis for a significant bear market rally, which can last several months and usually retraces 38% to 50% of the previous bear cycle before starting the next bear leg of a larger degree. Here are our key calls for 2014!

AUDUSD … we expect a bear market rally in 2014!! In our 2013 strategy we highlighted the huge triangle pattern in the AUDUSD as a major breakout pattern. From a pattern standpoint triangles are in most cases trend continuation patterns but given the latent wave 5 structure in the commodity space (CCI Index future), we were unsure last year whether commodities had maybe already seen their secular top in Q2 2011 or if we could still see a final overshooting into the 2013/2014 time frame. In this discussion we highlighted the key support of the triangle pattern at 0.97 as a pivotal support and strategic game changer for a) the AUDUSD and b) for commodities and finally also Emerging Markets. From a pure pattern standpoint, with the break of the pivotal 0.97 key support the whole triangle formation in the AUDUSD has been mutating into a huge top formation, which now clearly confirms the completed wave 5 bull cycle in the commodity complex from the 1999 secular bottom to the Q2 2011 top as a secular top.

Chart 42. ) USDJPY Monthly Chart


Chart 43. ) AUDUSD Weekly Chart


Chart 44. ) CCI Index Future versus EM’s/MSCI World Performance




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This technical structure fits and confirms the secular trend break in the relative outperformance of Emerging Markets versus the MSCI World (chart 44.), where the outperformance top in Emerging Markets in Q2 2011 more or less coincides with the major top in commodities. However, despite the mounting evidence that a secular top in commodities and Emerging Market outperformance is in place, tactically we expect a temporary comeback in 2014, and from a correlation standpoint the key variable for this call/trade will be the AUD. Tactically we see the AUD currently trading in a clear defined wave 5 pattern versus some pairs (AUDEUR and AUDCHF). From a cyclical/tactical standpoint we see this wave 5 moving into an important Q1 bottom as the basis for a significant bear market/countertrend rally into H2 before starting its next bear cycle. The risk in the USDAUD (chart 43.) is to see a final overshoot towards 0.85 but a break of 0.90 would imply that a major tactical bottom is in place and this trigger would be bullish commodities, gold (see chart 9.) and Emerging Markets as one of our tactical key calls or 2014!!

Keep in mind, in the commodity space and in gold we saw significant outflows in 2013, as a mirror of an ongoing capitulation process, and this makes our bear market rally/comeback call for 2014 an anti-consensus call. Furthermore, commodity and commodity sector outperformance is a classic late cycle phenomena in a bull market and in this context it would support our call to see from a potential Q1 tactical bottom in equities a relative comeback and outperformance phase in mining stocks, gold stocks, oil stocks, and Emerging Markets into H2 before topping out and following the next bear cycle of a larger degree in the AUD and in risk per se into 2015.

We expect a major EUR top in 2014!! The big surprise for most investors in 2013 was certainly the bullish EUR, and looking at the trade-weighted EUR index we can see the real magnitude and performance of the underlying EUR strength. Versus the Scandinavian safe haven currencies (NOK/SEK) we saw significant rallies, versus the JPY the EUR appreciated around 27% and versus the AUD we saw a 23% EUR bull market.

Fact is that a potential major US dollar bottom implies the EUR moving into an important top in H2 2014. From a wave perspective the bull move in the EUR index (chart 47.) from the 2012 low has an impulsive structure and in 2014 we generally see the EUR trading in a wave 5,

Chart 45. ) AUDCHF Weekly Chart


Chart 46. ) AUDUSD versus MSCI Emerging Market


Chart 47. ) EURO Trade Weighted Index




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which from a cyclical perspective should complete the bull structure in H2. This would be technically important since in the EUR index such a top would post a significant lower high versus the 2008/2009 high, which would be a rather bearish technical set up for the 2015/2016 time frame. Implicitly, such a roadmap would obviously have a significant impact on the relative performance of European equities. Tactically, more EUR strength into H2, and this is something we can more or less also apply to the CHF, would imply further relative headwind for European equities and the Swiss market index. In mid-December the Stoxx-600 has temporarily violated its relative summer low versus the S&P-500, which makes this relative bottom an even more significant support. Apart from a Q1 pullback, we see more EUR strength into summer as a latent risk for the European market to further underperform; it could also be a reason that a potential distribution phase in Europe starts earlier than in the US, apart from the fact that this could send Europe back into recession as a key reason for a potential bear market.

USDJYP on the way into a Q2 bull market top!! It was one of our 2012 key calls to expect the USDJPY to complete a major base, which in YEN terms (after completing a major wave 5 bull structure) should be the beginning of a several-year lasting bear market (chart 50.),

and this obviously should have a regime changing character on the macro side.

Following the underlying correlation versus the bond market, a major base in the USDJPY pair basically implied also a big trend reversal in US bonds. In 2012 we highlighted the huge divergence forming between USDJPY and the US 10-Year Treasury yield (chart 51.), which we saw as a springboard for the USDJPY pair as well as major trend reversal in the JPY would be a game changer for the Japanese stock market in absolute and relative terms (see page 26.) and in this context it was not a big surprise that in 2013 the Japanese stock market was one of the star performers globally, at least in local currencies.

Chart 48. ) EURUSD Daily Chart


Chart 49. ) STOXX-600 versus S&P-500


Chart 50. ) YEN Trade Weighted Index

22/10/13

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2 0 1 6 -2 0 1 7




Technical Strategy

Looking at the patterns in the USDJPY it strikes that from an Elliott wave perspective, the bull-run from December 2012 to May 2013 represents an impulsive wave 3. In May we warned about a several months lasting correction as a wave 4, and on track with our cyclical model the USDJPY (see chart 53.) has started its next bull wave from its October/November bottom. So from a pattern standpoint we have high conviction the Q4 bull wave has a wave 5 character in the larger degree and this is a pattern we obviously see against most JPY pairs (such as EURJPY and SGDJPY). The consequence of this pattern is the same as we have discussed for the AUD. Structurally, we see the 2012-2013 impulsive wave 5 sequence as just the first part of a long-term bull market. In 2012 and 2013 we highlighted the JPY index and its underlying 8-year cycle (chart 50.). We continue to see the JPY trading in a multi-year bear market, which from a time perspective should go at least into 2016, if not even into 2017. Having said that, tactically, completing a wave 5 bull cycle suggests the USDJPY moving into an important top in 2014. Keep in mind, on a monthly basis the pair (chart 42.) is moving into overbought extremes, and on a weekly basis we have a big divergence forming in our weekly trend work, which all in all implies the USDJPY to move into an important late Q1/early O2 tactical top as the basis for a longer lasting corrective bear cycle into H1 2015 before resuming the underlying structural bull cycle. From a price perspective we always had a target projection of 110 for wave 5. In case of overshooting 110 we would even get a target at 120, which however would not change our cyclical projection to move into a Q2 top at the latest.

USDJYP top would have consequences on the macro side!! From a macro perspective, a major USDJPY top in 2014 would have significant consequences. From a cross-asset class perspective a bounce in the JPY would generally imply the return of the fear in 2014!! In more detail - from a correlation standpoint a stronger JPY suggests an important bottom in bonds (a top in US yields) as the basis for a temporary bull cycle into H1 2015 and a strong JPY is obviously bearish risk, which implies a comeback of the safe haven assets at the latest in H2 2014. It particularly implies that in absolute and relative terms we should see an important top in the Japanese stock market in 2014. Keep in mind, being long Japan and short the JPY is one of the biggest consensus calls for 2014. What is the most likely timing for a top in the USDJPY? From a seasonal aspect we have seen important tops in late Q1/early Q2 in each of the last 5 years and this fits with a seasonal May top in the Nikkei-225.

Chart 51. ) USDJPY versus 10-Year US Treasury Yield


Chart 52. ) SGDJPY Weekly Chart


Chart 53. ) USDJPY Weekly Chart




Technical Strategy

2014 … a temporary comeback for Emerging Markets 2012 and 2013 were disappointing if not even outright bearish years for most Emerging Markets. In Q1 last year we highlighted the break of the secular outperformance trend of Emerging Markets versus the MSCI World as a long-term game changer. We know - the reason behind this break is a mixture of weak commodity prices and the too weak JPY. The relative outperformance top of Emerging Markets in Q2 2011 pretty much coincides with the secular wave 5 top in the commodity universe (see chart 44.) but another trigger for Emerging Market underperformance is usually also a too weak JPY. Each time we saw a significant bull run in USDJPY we saw a certain impact on Emerging Markets, and it is no coincidence that we see Japan breaking its structural underperformance trend versus the world, whereas at the same time we see Emerging Markets and most of Asia breaking their structural outperformance trend versus the world. So all in all a secular top in commodities confirmed by a major AUD top and a several years lasting JPY bear market are a clearly bearish long-term mixture for Emerging Markets. However, tactically we have a key call for 2014 and this is to see an important AUD low in early Q1 2014 as the basis for a corrective bear market rally into minimum H2. This bear market rally should be the time window for a rebound in commodities and therefore also a relative bounce of the Emerging Market complex (chart 46.) and most other Asian markets.

A critical point, and therefore a reality check for 2014 remains the Emerging Market currency block. In August we called a major low in EM currencies, which remains an absolutely pivotal support. It strikes that the pattern in the MSCI

Emerging Market Currency index (chart 54.) has a very similar form as in the AUDUSD last year. The result we know - the break of the 0.97 key support in the AUDUSD was the trigger for a big bear market and a break of the August low in EM currencies would have a very similar impact/message!!

As long as we don’t see this kind of worst case scenario, we are sticking to our relative rebound scenario for EM’s. In absolute terms the MSCI Emerging Market is trading in a multi-year sideways trading range. Within this pattern we expect a significant tactical setback in Q1, which should bring us an important tactical buying opportunity for our anticipated outperformance rally into summer. In this tactical bull leg we wouldn’t be surprised to see a test of the long-term breakout levels between 1100 and 1200 in the MSCI Emerging Market before topping out in H2 and starting another cyclical bear market into H1 2015.

Chart 54. ) MSCI Emerging Market Currencies


Chart 55. ) Hong Kong versus MSCI World


Chart 56. ) MSCI Emerging Market




Technical Strategy

China … a major top projection for H2 2014!! We obviously see the Chinese stock market in a very similar light to the Emerging Market complex. The July/August bottom last year was a major low in the Shanghai Composite and we still see this as the basis for a real double bottom and a breakout attempt into summer 2014. Last August we highlighted the breakout in copper as a game changer for China. Although short-term overbought, the technical picture in copper has been further improving with the later Q4 rally; and despite the risk for a correction in Q1, structurally we still see copper as a big pro for China and the same message we are getting from the Baltic Dry index, which completed a big bottom in 2013. So all in all we see the risk for a tactical correction in Q1 for the Shanghai Composite but at the same time and in light of our Emerging Market outperformance call, we would see this correction still as another tactical buying opportunity for a rally into an H2 major top projection.

However, one point we should have on the radar screen. The Shanghai Composite clearly underperformed the recent rally leg in Copper and the Baltic Dry index, which is suspicious. Tactically the Shanghai Composite is sitting on a big support in early January at 2100. A break of this level would imply that a re-test of the July bottom is underway and from a technical perspective the break of the July low at around 1950/1920 would be a big game changer and imply that a big negative surprise in China would be underway!!

In this context it is important to highlight that in the bigger picture the Shanghai Composite still has a rather high correlation to the Nikkei-225 bubble chart (see chart 39.). Again, a bubble is a major event, which usually takes years to be worked off. A bubble is accompanied by extreme sentiment in both the upside (final overshoot) and the downside. From a sentiment standpoint it is usually the extreme sentiment situations where we have certain and relative stable patterns forming. In this context we see most bubbles following a very similar pattern in time and price and this also after the burst of a bubble. If this correlation continues to stay that high we should see the Shanghai Composite moving into an important top in H2 2014 as a setup for another significant cyclical bear market.

Chart 57. ) Shanghai Composite


Chart 58. ) Baltic Dry Index versus Shanghai Composite


Chart 58. ) Shanghai Composite versus Copper




Technical Strategy

Japan … structurally bullish but cyclically toppish in 2014! It was a key call of our 2012 strategy to expect a major low in the Nikkei-225. “The set for a new structural bull market” was the headline for our 2013 strategy and as we know - the rationale behind these calls was the JPY. Again, from a correlation standpoint we effectively saw a major trend reversal in the JPY as a game changer for Japan and as a springboard for the Japanese stock market in absolute and relative terms. Relative to the world we expected Japan moving into a systematical outperformer position. In this context as well as taking into account the technical setup in the Nikkei-225, we said that the 2012 bottom in Japan could even be the start of a new secular bull market. Keep in mind, in 2012 the Nikkei-225 was in a position to form a significant higher low versus its 2008 major bottom, whereas the TOPIX has successfully retested its 2008 low, and the break of 1000 last year has completed a huge and textbook double bottom, which alone is technically bullish. However, the real bullish message we are getting from the breadth side, where last year’s bull market broke the multi- decade bear trend in the advance/decline line of the Tokyo stock exchange. We see this signal as the ultimate confirmation that Japan is trading in a new secular bull market.

Conclusion: No bull market is one way and on the back of our JPY call (see page 22/23.) to expect the USDJPY to trade in a wave 5 of a larger degree, we also see the Nikkei-225 and the TOPIX trading in a final tactical bull wave, which is very likely to move into a big top in Q2. With the new breakout in the Nikkei-225 and in the TOPIX we are getting initial divergences in our indicator work on the upper time frame (chart 62./63.). Last year we highlighted the Nikkei-225 and its record high extension to its 200-day moving average in May. We said that a several months lasting correction would be likely as a mean reversion process but no bull market tops out in a high momentum top, which means at least one more bull leg would be missing to for a potential bearish divergence and this is exactly what is currently forming and very likely to complete at the latest in Q2.

So On the one hand we think the underlying long-term structure in Japan has turned bullish but tactically and against the very bullish consensus, we expect Japan

Chart 59. ) Nikkei-225 versus MSCI World


Chart 60. ) Nikkei-225 Monthly Chart


Chart 61. ) TOKYO Stock Exchange Advance/Decline Line 4/1/14

84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14

000'S

-300

-250

-200

-150

-100

-50

0

50

TOKYO - ADVANCE DECLINE LINE

Source: Thomson Reuters Datastream

secular breadth breakout




Technical Strategy

to move into an important cyclical top in 2014 as the basis for a corrective bear market into H1 2015 as the next major buying opportunity. Keep in mind, any kind of a bigger correction, even if we were to see a temporary negative surprise into 2015, is very likely to produce another higher bottom versus its 2012 cyclical bottom and this should be the springboard for another bull cycle in later 2015. Tactically, after calling a trading bottom in October/November, our short-term tactical roadmap remains unchanged. Short-term we are looking for a top very early Q1 and a setback into deeper Q1 as the basis for further upside into late Q1/early Q2, where via a top projection for the USDJPY we could be at least at the beginning of a distributive top building process. Our price targets for the Nikkei-225 are unchanged. After the break of the May top at 16000 we have a next target projection at 17000 and 18500, which translates into a target projection at 1400 for the TOPIX, which is the 62% retracement of the 2007/2008 bear cycle.

Commodities … the 2011 secular top is confirmed!! Our clients and regular readers know that in Q2 2011 we had major tactical top projection for commodities and we expected a corrective bear cycle into summer 2012 before starting another tactical bull cycle as the potential final bull wave and to complete the underlying secular bull market in commodities that started in 1999. From an Elliott wave perspective it was more or less clear that the 2007 top in commodities represented the top of an impulsive wave 3, which implies that the sharp decline in 2008 was a wave 4 correction and in this context we saw the 2009 bull cycle in

commodities basically as the last major bull wave in the underlying secular bull market. Again, structurally and from a cross-asset class perspective we highlighted the negative correlation between commodities and equities and we said that if we are correct and equities are really trading in the late stages of a secular bear market we would also need to see commodities moving into a secular bull market top.

In our 2013 strategy we were not sure whether the 2009 bull cycle (wave 5 of a larger degree) had already seen its ultimate top in Q2 2011 or if we could still see a final overshooting into 2013/2014 in the context of expecting the 2012 bull cycle for risk assets moving into a 2013/2014 top. As we have discussed earlier in this report, the breakdown in the AUD/risk correlation last year was a game changer in this discussion.

Chart 62. ) TOPIX Weekly Chart


Chart 63. ) Nikkei-225 with Extension to its 200-Week Moving Average


Chart 64. ) CCI Index Future (Equally Weighted)




Technical Strategy

In our 2013 strategy we have highlighted the huge triangle formation in the AUDUSD as a major breakout pattern, and at the end of the day as a reality check for risk, particularly for commodities. A triangle usually has a bullish trend continuation character, and the rationale behind our call was that we could still see a final overshooting in commodities to finally complete a major wave 5 structure. As we know, with the break of the key support at 0.97, the triangle in the AUD changed its character into a major top and it is not the only indication that a secular top is in place. The break of the May 2012 bottom in gold as well as the continued bear cycles in the soft commodities and agricultures are just other prominent examples of the changed secular structure; and, we got the ultimate confirmation from inter-market side where Emerging Markets have broken their secular outperformance trend versus the MSCI World.

Tactically we expect a significant bear market rally in 2014!! However, on the back of our wave analysis and bear market rally scenario for the AUD, we expect the commodity complex to start a significant bear market rally and therefore a comeback from a potential early Q1 tactical bottom into minimum summer. In soft commodities we have see a brutal bear market since the 2011 top. The agricultural and the soft commodity sector we see as a significant rebound candidate in 2014. Via their late cyclical outperformance character we wouldn’t be surprised to see commodities topping out later in 2014, where equities have maybe already seen their top. Keep in mind, with last year’s decline we have seen a big capitulation in the commodity space. We have seen big outflows and the consensus for commodities and gold is very bearish. No bear market is one way and in this context we expect to see commodities as a candidate for a bear market rally into H2 before resuming its underlying bear cycle together with the AUD into a potential major long-term cycle bottom in 2016, which then could be the basis for the next real and longer lasting bull market in commodities.

After forming a major negative divergence in our indicator work and after breaking its $100 key support we called a major top in crude oil in October last year. All in all we have been calling for a larger and longer lasting corrective a-b-c pattern where into December we should get a bear market rally, which however should only post a lower high as the next bear set up into early 2014. On track with our cycles we have seen a bounce towards our target projection at $100 as a wave b counter move. With a new daily trend sell signal in place see oil on track with our wave correction scenario into a deeper Q1 bottom as the next major buying opportunity for oil and related sectors. A break of the November bottom would imply a target at $85 into February where we very often see an important bottom in the price of oil.

Chart 65. ) Crude Oil Daily Chart


Chart 66. ) DJ UBS Soft Commodity Index Weekly Chart




Technical Strategy

Our commodity call has obviously also consequences for our 2014 sector calls. With commodities as a rebound candidate, we expect commodity related sectors to outperform significantly from a Q1 bottom into summer. In Europe we saw an important bottom in the mining sector last July. Although the relative performance of the rebound was so far very weak, we nonetheless expect more bouncing and actually a tactical outperformance phase in the mining sector into summer. In absolute terms we have seen in November in the SXPP (chart 67.) a first test of the 2011 down trend. With the next rally we expect this trend to be broken, which implies a target for the SXPP at 455 to 482 into summer.

The European energy sector was a great underperformer over the last 2 years. In the relative chart of the European energy sector versus the overall market we have a 3-year cycle running, which implies an important low in 2014 as the basis for a big relative comeback of oil stocks, which via its defensive character could feed through into a potential bear cycle for risk into H1 2015.

Gold … we expect a bear market rally in 2014!! On track with our cyclical models we called a major top in gold in August 2011 and given the 2011 over-speculation we have been looking for a significant and several months lasting correction process into Q2 2012 as our next major low

projection and the basis for a new bull leg in the underlying secular bull market. At $1529, gold hit an important bottom in May 2012, which from a cyclical perspective represents a 4-year cycle bottom and therefore a pivotal support. After the significant rally into October 2012 we saw renewed weakness coming into the precious metals market. In our 2013 strategy report we basically expected a weak Q1. We warned about the too bullish investor sentiment towards gold, we expected yields rising, which is usually bearish gold (chart 69.) and we said that in H1 2013 we could generally see more selling and a temporary re-allocation away from the former safe assets/havens towards more risky assets. The conclusion in our 2013 strategy was that we cannot rule out a negative surprise particularly in Q1, but a) we did not expect the break of the May 4-year cycle low at $1529 and, b) we actually expected a new bull cycle starting from a potential summer bottom.

Chart 67. ) STOXX Europe Basic Resource (SXPP) Weekly Chart


Chart 68. ) STOXX Europe Oil & Gas versus STOXX-600


Chart 69. ) US Real Interest Rates versus Gold




Technical Strategy

We have a similar picture in silver where we saw a loss of -37%. Together with the meltdown in gold mines, 2013 was in fact a nightmare for precious metal investors. The key question is how can we sort last year’s bear market into the long-term picture of gold. Does this mean that the secular bull market for gold is over, such as for the overall commodity space, and what we can expect in 2014?

Long-term cycles in gold still bearish until 2016!! The most important message comes from the cyclical front. With the October 2012 top, gold has set a first important lower high versus its major August 2011 top and from a pure cyclical perspective the break of the May 2012 4-year cycle bottom opens a new down cycle window of more or less 4 years. So gold has in fact a structural problem and it means that the yellow metal remains very likely bearish-biased into 2016, which is the next 4-year cycle low projection and it should bring us an 8-year cycle bottom as the next major long-term buying opportunity for gold and the precious metal complex. It is exactly the same cycle as we have in the AUD (see page 20./21.) and in this context we continue to see the AUD as a reality check for the tactical picture as well as the long-term picture in gold.

So how deep can a longer bear cycle go in gold? First of all, from a sentiment and flow/positioning perspective we think we already saw a very significant washout in gold last year. Sentiment-wise we have an amazing bearish consensus for gold (last year it was the other way around), and in silver, for example, we have the speculative short positioning at a record high, which is contrarian. Given this background we think any further downside potential into 2016 should actually be more limited instead of expecting another meltdown like last year’s. So regardless of what kind of further downside we may see into 2016, we think that gold will make a significant higher low versus, a) its secular bottom, and b) its last 8-year cycle bottom from November 2008 at $680. From a pure cyclical perspective this is very important as from an analytical standpoint this would mean that the underlying secular bull market in gold would still be intact and as we strongly believe that a

Chart 70. ) XAUEUR Weekly Chart


Chart 71. ) AUDUSD versus Gold


Chart 72. ) Gold Monthly Chart




Technical Strategy

potential 2016 low will be higher than $680 we think the underlying secular bull market in gold will remain intact!! As we said earlier in this report, no bull market (Japan and USDJPY) and no bear market (AUD) is one way and in this context 2014 should be the year where we see an interruption of the underlying bear cycle. Tactically, the middle cycle of a 4-year cycle is obviously a 2-year cycle and 2014 is the year we should see gold moving into this important cycle low, which we think will be the basis for a corrective bear market rally before resuming its underlying bear cycle into 2016. Again, the correlation of gold to the AUD is still very high (chart 71.). From a pattern standpoint we see the AUD trading in a wave 5 of a larger degree and in this context we also see gold trading in a wave 5 of a larger degree (which is the same wave pattern we see in the XAUEUR (chart 70.)) and given our low projection for the AUD in Q1 we factually expect gold moving very early this year into an important tactical low as the basis for a corrective and longer lasting bear market rally into minimum H2 and best case into H1 2015 before starting its second bear wave into 2016.

Keep in mind, apart from the fundamental supply and demand background we have basically 4 major factors impacting gold: these are real interest rates, inflation expectations, the US dollar (AUD), and the risk sentiment or respectively, the save haven effect. Given the underlying bear trend in the US dollar and a major low projection in the AUD in Q1, we should get a clear boost for gold in 2014. Inflation expectations have bottomed in July 2013 but are still rather weak. If we really see a temporary comeback in commodities this implies increasing inflation expectations and this is bullish gold. Given our H2 low projection for the US dollar we would have a bullish time window for gold from Q1 into minimum Q3 (see chart 71.). With a potential top in risk and therefore also a top in commodities and a bottom in the US dollar, the inter-market background for gold would actually start deteriorating in H2. However, at this point we should see at least a temporary comeback of the safe haven effect in gold apart from the fact that declining yields into H1 2015 could be the reason for an extension of the bear market rally into H1 2015.

Conclusion: Gold trades in a maturing first bear wave of a potential larger corrective (A-B-C) cyclical bear market pattern that

we still see as part of an intact secular bull market. The whole bear structure from the 2011 top in gold and the gold bugs index (HUI) is taking an impulsive wave 5 structure, which is long-term bearish but implies that tactically, gold and gold mines are on the way into an important medium-term low.

Via a major low projection for the AUDUSD in early Q1 we expect gold/gold mines to hit an important cycle bottom in early Q1 as the basis for a comeback and a corrective bull cycle into minimum H2 2014 and best case H1 2015. From a price perspective, a break of the July 2013 low at $1180 would call for a final overshot towards $1150 to worst case $1100 (which we think is not likely). A break of $1267 would imply that an important tactical bottom is in place!! A bear market rally usually retraces its previous bear cycle by around 38% to 50%, which implies a target for gold at $1500 to $1530 into a potential Q3 top.

Chart 73. ) Gold versus US Inflation Expectations


Chart 74. ) Gold Daily Chart




Technical Strategy

In a precious metal bull cycle, silver usually outperforms gold, which means silver is a major rebound candidate for 2014. In relative terms silver has already posted a higher low versus gold, which is bullish silver!! A real meltdown in 2013 we have seen in absolute and relative terms in the gold mining sector. With an extension of around 57% to its 200-week moving average, the gold bugs index is historically high oversold, and to a similar degree oversold as it was in 2000 and 2008, which were major long-term buying opportunities for gold mines!! As a contrarian call we se the gold bugs index as a major mean reversion candidate in 2014. Keep in mind, we have seen a huge washout in gold mines and we also have massive short positioning in this sector, so the short covering factor alone should be the basis for a rather aggressive bear market rally in the HUI index in 2014.

In the bigger picture, we label the 2011/2014 bear market and a potential extension of this bear market into 2016 as just an interruption of the underlying secular bull market, which historically seen could be a similar pattern to the last secular bull market. The only difference is that the cyclical bear from 1973 into 1975 was only 2 years long, where gold halved its value before exploding into its 1980 bubble peak. If the current cyclical bear really develops in a larger A-B-C bear pattern, overall it suggests a 5-year lasting cyclical bear before starting its next major bull cycle from a potential next 8-year cycle bottom in 2016.

Over the last few years a lot of clients have been asking when would be the most likely timing to see this bubble in the precious metals area. In this context we always highlighted the 10-year cycle, as well as the phenomena that more or less all financial bubbles in history peaked only in the last 3 years of a decade. If this pattern remains stable we should generally see a new bubble phenomena between 2017 and 2020. In our 2013 strategy we discussed where we could be wrong with our “The endgame of a secular bear” call. Last year we said, “a high momentum breakout in the S&P-500 and the German DAX would be an indication that we are already trading in a new secular bull market where a potential cyclical bear in H2 2014 and/or H1 2015 would then be just a pullback to previous breakout levels”. However, last year we also said: “a high momentum breakout can only be justified by a wave 3 extension (which is factually the case) and such a bull run could only be justified by a kind of inflationary driven bull market on the back of too aggressive money printing by central banks, which is a mechanism that could finally end up in a crack-up boom”. Last year we said that this is in our view an unlikely scenario, which today we know was wrong. So even if we really see central banks tapering in 2014 and trying to go back to normal, a potential bear cycle in risk into H1 2015 would very likely provoke the same reflex as in 2011, 2012, and 2013, so that in 2015 we could experience déjà vu in terms of money printing. If so, it could be the basis for the crack-up boom where we finally see major asset price inflation, including another major bull market in gold towards the end of the decade.

Chart 75. ) Gold Bugs Index (HUI) Weekly Chart


Chart 76. ) Gold versus Silver/Gold Spread




Technical Strategy

US Bonds … the secular trend change is confirmed! It was a key call of our 2012 strategy to see US and European yields moving into an important low, and we said that with regards to the secular structure, the 2012 low in yields could be THE low and the end point of a 31-year lasting secular bull market in the US and European bond market. Tactically, in 2013 we have seen yields rising significantly as just the beginning of the “great rotation” and the new mega trend, which is selling bonds and commodities versus buying equities and therefore more risky assets. Fact is that with last years bearish year for bonds we got the ultimate confirmation for a secular trend change from our yearly momentum, which has generated a reversal signal and confirms that the 30-year cycle low (as part of the 60-year cycle) is in place. However, over the last two years we argued that it is very unlikely to see a sharp v-shape reversal followed by a multi-year uptrend in yields, since this would simply kill the markets in the current macro setup. We thought and still think that a long-term bottoming phase in yields is still missing before a real and hard uptrend in yields starts. In this context we saw last year’s rising yields as just the first part of a bigger and longer lasting yields bottom - a very classic technical bottom building process, before the real bear market in bonds starts.

Tactically bonds are moving into an H2 buying opportunity!! Tactically, we called another important top in October for US and European bonds and we expected yields to rise into

important tactical top (low for the T-Bond Future) in late December/early January. From a cross asset class perspective we said in October that a break of the 3.00% could be a tactical game changer for the risk sentiment with increasing nervousness of investors about yields rising too fast too high. At the end of the day we think that the rising yields will be the reason for the tactical setback in risk in Q1. Ironically, the current tactical bear wave in US bonds could bring us an important medium-term low, since in the T-Bond the October down wave has a clear wave 5 character, with a divergence forming in our daily and weekly indictor work. So tactically we expect a significant rebound in the bond market into late Q1 before starting another down test into summer/H2 where we a) expect to see a re-test or potential temporary break of the early O1 low, which implies a test of the 1994 long-term bear trend in the

Chart 77. ) US Long Bond Yield Yearly Chart


Chart 78. ) US T-Bond Daily Chart


Chart 79. ) US T-Bond Daily Chart




Technical Strategy

US 10-Year Treasury chart into summer and b) this move down should bring us an important low in the US and European bond market for a big rally into deeper 2015, which could bring us a yield level of around 2.30% as part of a long-term secular bottom building process in the US bond market.

In Europe the October low in the German Bund Future has an absolutely pivotal character. A break of 136.60 (it does not matter when) would from a cyclical perspective imply more weakness into 2016, where we have the next major low projection for the Bund. As long as this is not the case we see the Bund bullish biased from a potential summer bottom into H1 2015 before starting its next tactical bear cycle.

Keep an eye on the JGB as a potential black swan for 2014. The April 2013 high in the JGB represents a 2-year cycle top, which means that Japanese bond market is bearish biased as long as trading below its 2013 peak. With the recent reversal we get a new momentum sell signal, which suggests that a new down test in JGB’s is underway. As long as we don’t see a break of last years summer low at 141 the overall picture remains stable/neutral in this market, whereas a break of 141 would imply from a pure technical perspective that a major top is in place and in this context we would have to expect a big negative surprise in the Japanese bond market.

Chart 79. ) German Bund Future Weekly Chart


Chart 80. ) JGB Weekly Chart




Technical Strategy

Conclusion: The S&P-500 trades in one of the longest cyclical bull markets since 2009. The US market is overbought on all

time frames, in our indictor work we have non confirmations forming on all time frames, the market sentiment is hitting historical extreme levels, the selectivity is increasing and in the outperformer markets/themes we see charts taking a more and more parabolic shape. All this we see as evidence that the US market is on the way into an important top in 2014, which from a cyclical perspective we expect to be a 7-year cycle peak, and which should be the basis for a first cyclical bear market as part of a new secular bull market.

Tactically, after the anticipated mid December buying opportunity we have been looking for another rally into a late December/early January top. After having reached our 1850 target, we have now the missing divergences forming in our daily trend work, which together with the non confirmations on the upper time frame and our sentiment work at extreme levels gives us conviction that the SPX is on the way into our anticipated early Q1 tactical top. From a cyclical perspective we expect a corrective set back of 5% to 10% into a late January/early February bottom as the next significant tactical buying opportunity. Looking at our cyclical model and taking into account market patterns we see the most likely timing for a major market top in later Q2 and/or a deeper summer top (June) followed by a several months lasting distribution before starting the real correction into later 2014 and into H1 2015 as our preferred timing for an important market bottom.

From a price perspective we expect the SPX pulling back to 1730 into a late Q1 low followed by a final rally towards a 1920 -1970 target zone for a final top into summer. In a potential cyclical bear market into H1 2015 we see the risk of a 20% to 30% correction, which should send the SPX minimum down to 1570, which is the last major breakout level in the SPX.

Small and mid caps are record high overbought and the investor optimism about small and mid caps is extreme in the US and in Europe. From a style cycle perspective we expect small and mid caps to start underperforming in H1, which suggests to see a negative surprise in small and mid caps this year, whereas large caps should outperform, which leaves the door open to still see the one or other overshooting particularly in the hype themes such as technology, which we expect to move into a big top in 2014.

Chart 81. ) S&P-500 Daily Chart


Chart 82. ) STOXX-600 Weekly Chart




Technical Strategy

On the sector front we expect 2014 to get a much more volatile and selective year than last year was. The trend of cyclical sector outperformance versus defensives is intact, and apart from an early Q1 bounce in defensives we expect cyclicals to continue to outperform into summer. However, by anticipating increasing selectivity we expect early cyclical sectors to start underperforming in Q2, which means semiconductors, transport and banks should start losing momentum into summer, whereas we expect late cyclicals and in particularly materials, miners and energy to outperform into deeper summer. A potential bull market top in summer/Q3 this year we generally expect to be the timing for a major rotation back into defensives, so food, healthcare and utilities. In Europe the energy sector was one of the biggest underperformer of the last 2 years. We expect energy to move into major relative bottom in 2014 as the basis for a new outperformance cycle into 2015.

On the macro side we expect the US dollar moving into an important bear cycle bottom in H2 as the basis for a major bull market into the 2015/2016 time frame. More US dollar bearishness in H1 implies more relative headwind for European markets and via a major tactical low projection of the AUDUSD we expect a bear market rally in commodities as a classic late cycle outperformance theme. Oil we expect to move into a February bottom as the basis for a big rally into summer. Buy oil stocks into Q1 weakness!

Gold trades in a maturing cyclical bear market as part of a still intact secular bull market. Via a major low projection in the AUDUSD in early Q1 we expect gold to start a comeback/corrective bear market rally from early Q1 into minimum Q3 and best case H1 2015. Our gold target into Q3 is at $1500 to best case $1530. Gold mines are record high oversold (similar to 2000 and 2008), so we expect an aggressive bear market/mean reversion rally in the gold bugs index. Buy gold mines!!

A bear market rally in the AUDUSD also implies a comeback of Emerging Markets. Into early Q1 we have the risk for another correction but from deeper Q1 low into H2 2014 we expect Emerging Markets to outperform the MSCI World before moving into an important H2 major top.

On track with our long-term cycles, the JPY has started a multi-year bear market in 2012 and the JPY reversal was the anticipated regime change for Japan and the basis of a new secular bull market in Japanese equities. No bull market is one way! The Nikkei and the USDJPY are trading in an Elliott wave 5 of a larger degree, which suggests Japan/USDJPY moving into an important cyclical bull market top in H1 2014 as the basis for a corrective bear cycle into H1 2015. Our next major target for Nikkei-225 remains at 18500. Our preferred timing for a top in Japan is a later Q2 top so we would sell/take profit into potential Q2 strength.

Summer 2012 represents the top of a 31-year lasting secular bull market in US bonds. After the anticipated move higher in yields last year we expect (apart from an early Q1 pull back) further rising yields into summer 2014. However, by anticipating a top in risk we expect bonds to move into an important cycle bottom as the basis for a bear market rally into H1 2015. Obviously, falling yields into H1 2015 should be the return of the fear, which means we will see a big bounce in the JPY and gold could extend its bear market rally via a revival of its safe haven status and falling real interest rates

In Europe we have seen a high momentum top in late November. Following our cyclical road map we expect an early Q1 correction followed by a final bull leg into a summer top. Whereas the DAX, as an aggressive outperformer in 2013 was the big surprise and overshoot our 8300 target, the STOXX-600 has more or less exactly reached our 2013 target at 320. For a potential summer top this year we have a target projection of 350 for the STOXX-600 (chart 82.) and 10600 for the DAX-30 (chart 83.). In the periphery we expect more gains into summer. Portugal is currently the big outperformer and could surprise into summer. In the IBEX we are currently trading in a similar pattern as in Q3 2012 (chart 84.) as a kind of mid cycle correction pattern before starting its last rally to complete a bigger bull wave. In summer 2012 we have highlighted the major bottoms in the periphery and we said that these bottoms are very likely representing the low of a major bear market. Last year the IBEX has broken its 2007 bear trend, which is long-term bullish. However, tactically we see the IBEX moving into an important top in summer 2014, which should complete a wave C bull cycle followed by a significant bear cycle into H1 2015.



Technical Strategy

In May last year the Swiss Market index has exactly hit the 162% Fibonacci extension target of the 2010/2011 bear cycle at 8411, which is an important technical resistance level. We called the May top last year as a potential major top since we expected the start of a longer lasting correction in the hyped food and healthcare stocks, which should obviously weight on the market. Furthermore, in our last years strategy we highlighted the overbought monthly momentum chart in the SMI but we said that there would still a bigger divergence missing to complete a bull cycle of a larger degree. The SMI has clearly overshoot our 2013 target at 7500 but with last year high we have now the kind of monthly divergence as a potential leading indicator for a major top in 2014.

Generally, last year the SMI has broken its 2011 outperformance trend versus core Europe and via continued US dollar weakness (CHF strength) into minimum summer as well as expecting more underperformance in defensives in H1, the SMI will have problems to overcome 8411. Although a break of 8411 would theoretically call for a re-test of the all time high at 9500, we think the momentum of a new breakout will remain weak and we would have a best case target at 8800 for the SMI into summer and if we get a surprise on the upside the surprise can in our view only come from the financial sector. Tactically, and following our general call on risk/equities, we expect the SMI to correct from a summer top into H1 2015 although a potential top in risk globally would be exactly the time to buy Switzerland from a relative perspective for an outperformance move versus core Europe into H1 2015.

Chart 83. ) DAX-30 Daily Chart


Chart 84. ) IBEX Weekly Chart


Chart 85. ) Swiss Market Index Weekly Chart


Chart 86. ) Swiss Market Monthly Chart




Technical Strategy

Chart 87. )




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Technical Outlook 2014 Global - · PDF file · 2014-01-08Technical Outlook 2014...

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