Technical Strategist 2010 Technical Outlook

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aUBS Wealth Management Research / 14 December 2009

This report has been prepared by UBS Financial Services Inc. ("UBSFS")

PLEASE SEE IMPORTANT DISCLAIMERS AND DISCLOSURES THAT BEGIN ON PAGE 11

bTechnical Strategist2010 Technical Outlook Peter Lee, Chief Technical Analyst,

[email protected] +1-212-718888 Ex 01

Year of the Tiger Convergence of Cyclical and Secular ForcesThe year started with the widely anticipated worldwide pandemic ofInfluenza A - H1NI1 or swine flu. However, it was not as deadly as firstpredicted. Similarly, the economic virus that infected many economiesaround the world the prior year appears to be less serious than firstfeared. All in all, 2009 can be best described as the aftermath of a largefinancial hangover. Although the global economy barely averted a fi-nancial meltdown, as with any major hangover, it will take considerabletime and effort to fully recover from the damages incurred in the priorperiod. During the year, we witnessed more painful milestones thanmost investors could digest in their lifetimes. For instance, the 20-monthbear market from October 2007 to March 2009 resulted in declines of57.7% for the SPX Index. This makes this bear market the second-worstbear in the past 80 years, surpassing the bear market of 1937-1938 (-54.5%) but behind the 1929-1932 Great Depression induced bear mar-ket (-86.2%). Unemployment in the United States surged to 10.2% orto the highest level in the past 26 years. Home foreclosure rates alsojumped to the highest level since the Great Depression of the 1930s. Tostabilize the financial sector and to revive the US economy, Congressapproved an unprecedented number of spending/tax cut stimulus andfinancial bailout packages. Included were popular programs such as theTARP bailout, Cash for Clunkers, the New Home Owners Tax Credit andothers.

The year began with extreme fear and risk aversion. This soon subsidedas selling eased and key financial markets established cyclical lows dur-ing March. Many of the economically sensitive sectors, the battered fi-nancial arena, high beta illiquid securities, small caps, micro caps andemerging markets soon recovered from their respective lows. With two

weeks remaining before the end of the year, it appears almost all majorequity markets will end the year with gains. The benchmark US index,the SPX Index, has now appreciated 22.5% YTD. In fact, from its 6March low at 666.79 to its recent December high of 1,119.13, it hasrallied an impressive 67.8%, placing this rally as one of the stronger cy-clical bull rallies in recent memory. This cyclical bull now surpasses theprevious Tech/Telecom cyclical bull of nearly 41%, at least based oncomparable time periods from March 2003 to December 2003.

The popular decoupling global investment theme once again attractedinvestment interest. The benchmark large-cap international market, theMSCI EAFE Index, has so far appreciated 26%. Asian equity marketsresumed their market leadership roles as evident by impressive year-to-date gains of 120% for China, 77.5% for India, 70% for Taiwan, 62%for the Philippines and 52% for Hong Kong. Two Japanese benchmark

indices, the Nikkei 225 and TOPIX, lagged their Asian peers, returning9% and 3%, respectively. There were a few underperformers concen-trated in two regions the Middle East and Africa: Kuwait (-13%),Kenya (-10%), Jordan (-7%) and Morocco (-5%).

After a global real estate bubble burst, a global credit crunch, a globalfinancial crisis and finally a global recession, the global economies be-gan to recover. The recovery first started in the emerging markets andsoon spread to developed economies including our very own US econ-omy. As can be expected, coming out of an economic trough, investorsinitially turned to the economically sensitive sectors and higher beta se-curities. Although the popular long-term buy and hold investmentstrategy, consisting of buying and holding a basket of S&P 500 stocks,has also recovered from sharp losses this year, it is still down nearly25% over a 10-year period. Tactical investors continue to excel in thistrading range environment as evident by the sharp volatile swings in theSPX implied volatility index (VIX) as a 22-year high of 89.53 on 24 Octo-ber 2008 quickly reversed course, falling to a low of 20.05 on 25 No-vember 2009. However, as the current cyclical rally matures later this

Major Financial Markets As of 12/11/09

Markets Last Sale / Year-to-Date (%)

S&P 500 Index 1,106.41 22.49%DJ Industrial Average 10,471.50 19.31%NASDAQ Composite Index 2,190.31 38.89%Russell 2000 Index 600.37 20.21%Nikkei Stock Average 225 10,107.81 14.09%MSCI EAFE Index 1,563.32 26.34%MSCI Emerging Market 972.79 71.56%U.S. Dollar Index 76.59 -6.77%Euro/Dollar 1.4651 4.59%CRB Index 270.86 18.00%Crude Oil Light Sweet 69.87 56.66%Gold 100 Troy oz COMEX 1119.90 26.64%

10-year U.S. Treasury Yield 3.54% 60.13%2-year U.S. Treasury Yield 0.80% 5.58%Source: Reuters, as of 11 December 2009

Source: Reuters, as of 11 December 2009


Major Global Equity Indices

Percentage Year-to-Date Changes for 2009

World Emerging Markets

Percentage Year-to-Date Changes for 2009
mailto:[email protected]:[email protected]


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Technical Strategist 2

S Wealth Management Research / 14 December 2009

year, we wonder if volatility will begin to expand again? Will investorsrevert back to a stockpickers market environment and focus on sec-tor/stock selection and active management?

With two week until the end of the year, all ten major S&P 500 sectorsappear headed for yearly gains. The economically sensitive S&P sec-torsincluding S&P Technology (54% YTD), Basic Materials (42%) andConsumer Discretionary (38%)are leading the cyclical rally, outpacingthe SPX Index (22.5% YTD) and peer groups. Defensive sectors continueto lag the market as investors have shunned defensive, low beta andincome related sectors including: Communication (3%), Utilities (8%),S&P Energy (9.5%) and Consumer Staples (13%). In a nutshell, betaand momentum securities generated the best returns this year. Will thissame strategy work next year when the cyclical bull begins to mature?

On the currency front, the main theme heading into late last year(2008) and into the first quarter of 2009 were deleveraging, risk aver-sion and deflationary hedges. However, this trend quickly reversed di-rection soon after the March bottom as global investors sought out lev-erage, increased risk taking, and global growth. Emerging markets, cy-clical sectors and high beta securities attracted widespread investmentinterest as risk seeking trades proliferated throughout the year. Surpris-ingly enough, the relatively low interest rate environment in the US cre-ated a new carry trade via the US dollar. As you can see from the en-

closed FX YTD table, almost all foreign currencies rallied sharply againstthe US dollar. The Euro returned 4.6% YTD. The UK British Pound ap-preciated over 11.3% heading into the end of the year. The Japaneseyen and Swiss franc gained 1.8% and 3.5%, respectively this year. Thestrongest performances were concentrated within natural resource andhigh yielding currencies including the Canadian dollar (15%) and theAustralian dollar (30%). Will this strong trend continue next year or willthere be a reversal?

Hard assets such as Commodities also witnessed volatile swings over thepast year as evidenced by the CRB Index recording a record high of473.97 (July 2008) and then suddenly plummeting to a low of 200.16(February 2009) or declining 58% in 7 months. In what appeared to bea black swan phenomenon, the global credit crunch last year led tomany non-correlating assets including Commodities quickly converging

to 1. Two key commodities: Crude oil (-77%) and gold (-34%) fellsharply from their respective 2008 highs of 147.27 and 1,033.9, reach-ing lows of 33.20 (January 2009) and 681 (October 2008). Similar toprior commodity recoveries, metals and in particular gold bottomedearly in the cycle. The recovery soon spread to energy and soft com-modities and others. However, there remains wide dispersions amongcommodities this year implying traders remain selective. Natural gas andlivestock commodities (lean hogs and live cattle) and some soft com-modities (wheat, corn and soybean meal) continue to underperformwith large losses.

As the recession came to an end and deflationary fears subsided, inves-tors quickly turned their attention to re-inflation and growth. In antici-pation of a recovery, the 10 and 30-year U.S. Treasury yields moved upby over 200 basis points during the first six months of the year. How-ever, rates soon reverted back to a trading range the next six months.Yield spread between 10-year minus 2-year yields also expanded to ahigh of 273bp, surpassing the extremes of September 1992 (258bp)and July 2003 (268bp). Will interest rates begin to rise when govern-ments withdraw their economic stimulus next year?





S&P 500 Sectors

YTD Percentage Change for 10 S&P Sectors

U.S. Dollar Versus Key Foreign Currencies

US Dollar YTD performance (%) against 6 Major Currencies

Commodity Futures

Year to Date % Changes for Lead Month Commodities

U.S. Treasury Yields

US Treasury Yield Curve December 2008-December 2009


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2010 Technical OutlookThe bear market from 2007-2009 may have been the worst bear mar-ket since the Great Depression of the 1930s. However, we believe nextyear in 2010 may be an important year as many cyclical trends will be-gin to converge with longer-term structural secular trends. The comingmonths will reveal whether the cyclical recovery is sustainable orwhether the bear market will return. So with the SPX Index up nearly68% can this cyclical bull be sustained? This year investors have favoredcyclical sector, high beta and momentum type securities. Will this trendcontinue or will investors turn to the defensive sectors and income re-lated sectors? Can the emerging markets continue with their strongoutperformances from next year? The US dollar has fallen dramaticallyagainst key foreign currencies. Is the recent strength the start of a tacti-cal turnaround? Commodity prices have recovered from their losses butthe CRB Index does not appear to be technically extended. Does thismean that hard asset class can still rally further into the coming year?Although the easy money has been made already this year and returnsmay be more subdued this year, we believe there may still be some un-finished businesses left for various financial markets, at least during theearly parts of the new year. We will remind investors and traders to re-main tactical and to adhere to a disciplined risk management system aswe suspect the second half of next year will become increasingly chal-lenging. We will now discuss key technical trends and major investmentthemes emerging in the new year.

US domestic versus international investing Since 2001, investors havegreatly benefited from the strong returns from international equity mar-kets as represented by the superior relative outperformance of the MSCIEAFE Index over the SPX Index. However, it appears that since 2008 thistrend has slowed and may have begun to reverse into a near-term con-tra-trend move. Nonetheless, we believe the monthly relative strengthanalysis still favors the EAFE over the SPX, longer-term. However, wesuspect global investors may soon gravitate to the safety of large-capUS domestic equities if adverse market conditions develop later in theyear. In the meantime, from a short-to-intermediate term basis, wewould not be surprise to see the EAFE and the SPX exchange short-termleadership roles via a trading band between the low-60s and the mid-70s.

US large-cap growth versus US large-cap value style investing Thegrowth versus value style investing debate continues. We again turn tothe monthly relative strength study to determine if investors continue tosponsor growth stocks over value stocks as they have done so since2007. Historically, growth is often associated with aggressive, higherbeta names while value is associated with defensive, income producinglower beta names. However, a number of our technical studies includ-ing a monthly relative strength analysis between large-cap US growthstocks (SGX) and large-cap US value stocks (SVX) continue to show thatthe investment pendulum favors growth stocks over value stocks. De-spite some minor setbacks since the 2007 bottom, it appears thatgrowth style investing retains its longer-term leadership role. It is nowtrading at 127 or within striking distance of the February 2009 high of133. A convincing surge above 133 would confirm a technical breakoutand solidify the growth over value call for years to come, in our opinion.On the international front, the MSCI EAFE Growth Index is also outper-forming the MSCI EAFE Value Index in what appears to be a global phe-nomenon as well.

US large-cap investing (SPX) versus US small-cap investing (RUT) Simi-lar to the growth over value call, we believe investors continue to favorlarge-cap stocks over small-cap stocks. Although small-cap stocks haveled from the March bottom, relative strength has deteriorated dramati-cally over the past few months. Failure to break out above key supply at110-115 coupled with a convincing breakdown below 99-100 furtherreinforce our belief that US large cap stocks will outperform US small-cap stocks in the coming year.

US developed market (SPX) versus international emerging markets Af-

ter dramatically outperforming their developed counterparts over thepast ten years, emerging market outperformance stalled during thecredit crisis of 2008. However, emerging markets quickly regained theirleadership role on November/December 2008 and rallied to 113. Trad-ing above 114-115 or the February 2008 high confirms a major break-





Domestic Versus International Investing

Monthly Relative Strength Analysis SPX and EAFE Indexes

S&P Value (SVX) Versus S&P Growth (SGX)

Monthly Relative Strength Analysis SVX and SGX Indexes

US Large Cap versus US Small Cap Investing

Monthly Relative Strength Analysis SPX and RUT

US Developed Market versus Emerging Market

Monthly Relative Strength Analysis - SPX and Emerging


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out extending the outperformance cycle.

S&P 500 SectorsConsumer staples (CMR) versus consumer cyclical (CYC) As early asJuly 2007, a monthly indexed relative strength study provided hints thatthe 5-year US economic expansion cycle was nearing an end. A basketof consumer cyclical stocks as represented by the MS Consumer CyclicalIndex (CYC) began to underperform against a basket of consumer sta-ples stocks as represented by the MS Consumer Staples Index (CMR).After peaking at a relative strength high of 107 on July 2007, a dra-matic reversal warned of a major shift toward the consumer staples sec-tor. In hindsight, this warned of an impending economic contractionand a stock market decline. On February 2009, this same relativestrength study recorded a major low in the low-50s exactly one monthprior to the March cyclical low. Although the recent sharp bounce ap-pears to resemble a V-type of recovery, we suspect the March cyclicalbull recovery will begin to slow as it encounters supply near the high-80s to low 90s. Failure to breakout here coupled with a reversal downwarns of a matured cyclical bull rally in need of a correction. If investorsbegin to favor consumer staples stocks and other defensive sectors overconsumer cyclicals and high beta securities, this may lead to the elusivecorrection. On the other hand, a convincing surge above the low-90smay extend the rally to 107-113.

S&P 500 Financial Sector (SPFIN) This has been one of the strongestperforming S&P sectors, recording gains of 170% from its March low.However, an overbought condition accompanied by a flat monthly rela-tive strength trend now suggests the start of a consolidation phase. Al-though upside potential to 250-265 or the 2008 breakdown and 30-month ma is possible, longer-term we believe a corrective phase ishealthy as this will establish the necessary technical base to substantiatehigher prices. The simultaneous bursting of numerous speculative bub-bles including global Real Estate, Credit, and Financials will require con-siderable time and effort to fully resolve. The recent explosive rally inFinancials reminds us of a similar situation in the past namely the after-math of the Tech/Telecom bubble burst and the ensuing rally in Techsand Telecom stocks from October 2002 to March 2004. After outper-forming peers, Tech/Telecom sector soon entered into extensive side-ways basing efforts lasting for nearly two years. Will the S&P Financial

sector also consolidate within a trading range between 150 and 250over the next two years?

S&P 500 Information Technology Sector (SPTEC) This leadership sector isup 81.6% from its March low and 54% YTD. The following develop-ments suggest a leadership shift began as early as last year. The monthlyrelative strength trend turned higher during late-2008 or 3-4 months be-fore the cyclical bottom. Technology recorded a higher low pattern duringNovember 2008 to March 2009 when many S&P sectors were recordinglower lows during the same time period. SPTEC also broke out of its2000/2007 downtrend as well as above its 30-month ma and 61.8% re-tracement from 2007-2008 decline ahead of peer groups. Although thereis intermediate-term resistance visible near 350-363 a convincing surgeabove this level can extend the rally to 400 and possibly as high 441 re-testing the 2007 peak. The 10 and 30-month moving averages now risingnear 310 and 330 will likely provide near to intermediate-term supportson any future pullbacks.

S&P 500 Energy Sector (SPENE) and Materials (SPMAT) It is unusual tosee these two natural resource intensive and cyclical groups divergingfor such a long time. For instance, Materials is up 42% YTD and Energyis up only 9.5% YTD. Although we favor Materials from a momentumand relative strength basis, we believe Energy remains the technicalvalue call for next year. It has established an intermediate-term technicalbase that we believe is capable of higher prices next year. The ability tofind support near prior key breakout at 400-420 accompanied by asurge above 455 can trigger a rally to the 2008 breakdown at 480-490and possibly as high as 525-540 under ideal conditions. The Materialssector should move higher as long as the Commodities recover. A con-

vincing move above 200-203 could ignite a Materials based rally to in-termediate-term supply at 195 (30-mo ma) and to 215-220 or 2008breakdown and 61.8% retracement from the 2007-2009 decline. Anysigns of weakness from the two cyclical sectors warn of the maturing ofthe cyclical bull rally.





Consumer Staples versus Consumer Cyclical

Monthly Relative Strength between CMR and CYC

S&P 500 Financial Sector

Monthly Price, 30-month ma and Relative Strength overlay

S&P 500 Information Technology Sector


S&P 500 Energy Sector



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International Equity MarketsThis year US Equities (i.e., SPX, DJIA, and RUT) have slightly underper-formed MSCI EAFE Index and dramatically underperformed MSCIEmerging Market Index. Global growth may continue to surprise to theupside enabling some Global Equities to continue to outpace US Equi-ties during early parts of next year. We believe EAFE Index will encoun-ter strong supply at 1,775-1,825 on an intermediate-term basis result-ing in gains of 13.5%-16.5%. Emerging Market Index is also nearingkey supply at 1,000-1,040 or 3%-7%. The ability to breakout here can

extend the rally to 1,130-1,160 or producing gains of 16%-19% fromcurrent level. Chinese Equities as represented by Shanghai CompositeIndex is now encountering crucial key supply near 3,350-3,450 or the38.2% retracement of 2007-2008 decline. A convincing breakout hererenders next upside target to 3,895 or the 50% retracement, generat-ing gains of 20%.

Nikkei Stock Average 225 (N225) Japanese Equities market has dra-matically underperformed its Asian counterparts for several years. Nikkei225 is now approaching important supply near 10,600-10,750 coincid-ing with 2004/2005 lows and August/September highs. We believe aconvincing surge above this initial supply would signal a recovery to-wards 11,314 or a 38.2% retracement from 2007-2009 decline and

then to pivotal intermediate-term supply at 11,700-11,850 or 1992 in-ternal trend line and 30-month ma. The ability to breakout here maylead to a rally towards the 50% retracement level at 12,648, over time.The 10-week ma (9,886) and 30-week ma (9,959) have just convergedto the downside in the past month indicating potential intermediate-term weakness. On the downside, initial support rises to 9,500-9,650.Key secondary support also moves up to 9,050-9,075 or July/Novemberbottoms. Failure to find support here suggests downside risks to 8,000-8,100 and possibly as low as 7,000-7,600 or the November 2008/March 2009 bottoms.

Shanghai Composite Index (SHI) This key Asian Equity market has sus-tained extreme volatility over the past four years, surging to a high of6,124 on October 2007 and then falling quickly to a low of 1,665 on

October 2008. From this recent low, the Shanghai Composite has morethan doubled in value and is now challenging a crucial supply level at3,368-3,478 or the 38.2% retracement from 2007-2008 decline as wellas the August peak, 2008 breakdown and 30-month ma. We expectvolatility to remain relatively high next year and for years to come. Theability to surge above key near-term supply at 3,500 may lead to an-other explosive rally towards 3,800-3,900 or the May 2008 high andthe 50% retracement. Optimistic forecasts to 4,300-4,420 coincidingwith 61.8% retracement and projected target based on breakout ofAugust high is possible under ideal market conditions. Initial support isevident near 3,100-3,200 corresponding to the 10-week and 30-weekma and then to 2,650-2,800 intermediate-term. 2,350-2,400 providespivotal investment-term support under extreme selling.

MSCI EAFE Index This benchmark International Equity market resem-bles a similar pattern to Dow Jones Industrial Average as evident by apotential multi-year head and shoulders top pattern. On a near-termbasis (over the past 3 months) EAFE Index has been confined to a trad-ing range between 1,500 and 1,620. The ability breakout above 1,620-1,650 corresponding to the recent October highs and the 50% re-tracement from 2007-2009 decline may lead to a rally towards key in-termediate-term supply at 1,700-1,775 or the 30-month ma as well asthe 2008 breakdown and 2000 peak (left shoulder). Under ideal condi-tions, EAFE can retest the 61.8% retracement at 1,824. On the down-side, violation of support at 1,500 opens the door for a decline to the30-week ma (1,459) and possibly to 1,360-1,400 or the June/July break-out and 10-month ma.

Nikkei Stock Average 225

Monthly Price, 10-month ma and 30-month ma





Shanghai Composite Index

Monthly Price with 10 and 30-month Moving Averages

MSCI EAFE Index

Monthly Price with 10 and 30-month Moving Averages

MSCI Emerging Markets Index

Monthly Price of Emerging Markets with 10 & 30-mo ma


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US Equity MarketsDow Jones Industrial Average DJIA has rallied 62.5% from the March lowat 6,470 basically in line with other major US Equity indexes. Although webelieve the DJIA can continue with its cyclical bull rally into early next year amajor head and shoulders top pattern is now developing (since 1997). Po-tential left shoulders reside near the 1999/2000 highs at 11,550-11,750.Head is evident near Oct 2007 high at 14,198. It is interesting to note thatthe recent shorter-term head and shoulders breakout during theJuly/August timeframe above 9,088 also projects upside target to 11,706.

On a positive note, investment interests in US large-caps including blue chipstocks can help the DJIA move higher this year. On a near-term basis, a tighttrading range is visible over the past two month between 10,120-10,250and 10,500-10,520. It is interesting to note that the recent rally is now chal-lenging key supply near 10,500 +/- 250 or the 50% retracement from2007-2009 decline, 2007 downtrend and the declining 30-month ma. Aconvincing surge above this supply will ignite a rally towards the 61.8% re-tracement (11,250) and the potential left/right shoulders at 11,550-11,750.On the downside, strong near-term support is at 10,120-10,250 or recentlows, the 10-week ma/50-day ma, and March uptrend. Violation hereopens the door for a correction to secondary support near 9,400-9,700 or30-week ma and October/November lows. Key intermediate-term supportremains at 8,900-9,100 coinciding with Jan/June neckline breakout.

SPX Index/Russell 3000 Index Both key indexes are very similar and assuch we will convey our technical thoughts on the more popular SPXIndex. 3 possible longer-term technical patterns have developed: (1)double/triple top; (2) double bottom; or (3) complex head and shouldersbottom (from 1997). We believe the third formation is likely scenariobased primarily on our longer-term trend studies dating back to 1800,current market psychology and macro conditions. Although we do notexpect the 666.79 March low needs to be retested we will remind in-vestors that it will probably take another 5 to 10 years before SPX tran-sitions to the next secular bull. Until then we believe SPX will be con-fined to a wide trading band between 850 +/- 50 on the downside and1,550 +/- 50 on the upside. On a near-term basis, volatility has con-tracted severely and we can expect the past 5-week trading range be-

tween 1,080 and 1,120 will soon be resolved either through a technicalbreakout (above 1,121) or a technical breakdown (below 1,080). Abreakout above 1,121 renders near-term targets to 1,155-1,165 or the30-month ma. Our 2010 projection remains at 1,230-1,250 correspond-ing to the 10-month head and shoulders bottom breakout projection(1,221), 61.8% retracement (1,229) from 2007-2009 decline, and theSept/Oct 2008 breakdown (1,225-1,250). Under best case scenario pro- jections to 1,348-1,362 is possible based primarily on the 1,008 No-vember 2008 neckline breakout as well as 76.4% retracement. On thedownside, a correction develops if initial support at 1,083 is breeched asthis support coincides with the bottom of 5-week trading band, 30-day,50-day ma and 10-week ma and June uptrend. Violation here thenopens the door for a deeper correction towards secondary support at

1,020-1,030 or the Oct/Nov bottoms. 979-992 or Aug/Sept bottoms,10-month ma and 944-956 or Jan/June neckline resistance providesstrong intermediate-term support. Investment-term support remains at869 or the pivotal July low and the right shoulders of a 10-monthhead/shoulders bottom.

The NASDAQ Composite Index COMP.Q has consistently outper-formed major US market indexes all of this year and has strong momen-tum heading into the end of the year. However, on a near-term basis(over the past 3 months) this technology-laden index appears to be con-fined to a trading between 2,024 and 2,214. Also note that the 2000downtrend and 30-month ma is also converging near this region, pro-viding formidable resistance. A convincing surge above 2,214 suggestsa retest of 2,251, near-term or the 61.8% retracement from 2007-2009

decline. Above this key supply renders upside targets to 2,404-2,485

Dow Jones Industrial Average

Monthly Chart of DJIA





S&P 500 Index

Monthly Chart of SPX

NASDAQ Composite Index

Monthly Chart of COMP.Q

Russell 3000 Index

Monthly Chart of RUA


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based recent base breakout as well as the 76.4% retracement. Initialtrading support rises to 2,115-2,156 or recent lows, July uptrend andkey moving averages including 30-mo ma, 10-wk ma and 30/50-dayma. Secondary support moves up to 2,020-2,024 or the 30-week ma,2006 low, and November bottom. Intermediate-term support is visibleat 1,930-1,960 or August/September lows and 10-month ma and then1,850 +/- 20 or July breakout. The July bottom at 1,727 provides in-vestment support.

Currency MarketU.S. dollar Index A 20+ year head and shoulders top pattern stillwarns of longer-term technical weakness. However, on a near-to-intermediate term basis an oversold condition coupled with a success-fully test of recent support near 74.5-75.5 coinciding with 76.4% re-tracement of the 2008-2009 rally, 2008 breakout and 2008 uptrendsuggests the start of a near-term technical oversold rally. This rally canbring USD back to key supply at 77.5-78.5 or the prior Au-gust/September pivotal breakdown, 30-week ma, 30-month ma andOctober/November peaks. Failure to surpass this formidable supply zonewill promptly send USD back into another trading range between 74.5and 78.5. Below 74.5 reaffirms the primary downtrend and opens thedoor for a retest of longer-term support at 71.05-71.56 or the 2008

bottoms. Under extreme selling and the violation of 71.05 we cannotrule out the possibility of a precipitous fall to as low as 67.55-68. Thisdownside target is based primarily on August breakdown projection aswell as the bottom of the monthly linear regression band. On the otherhand, if buying momentum increases into the technical rally and 78.5 isconvincingly breeched we can then expect USD to rally to as high as 80+/- 0.5 corresponding to the 38.2% retracement from 2009 declineand 1990, 1991, 1995 and 2004 pivotal lows. A convincingly breakouthere confirms an intermediate-term breakout and renders upside tar-gets to 82-83 or 50%-61.8% retracement. Major investment term sup-ply remains visible at 87.5-89.5 or March/April tops and the middle ofthe monthly linear regression band and right shoulders.

Euro-dollar Over the past 13 years, a bullish accumulation type cup

and handle technical pattern has developed on the EUR/USD monthlychart. Recent convincing surge above 1.3668-1.3812 or the December2004 and August 1995 highs earlier in the year solidified this multi-yearbreakout pattern. Based on this technical breakout we project initial tar-gets to 1.50-1.51 and then to 1.53. Longer-term target remains basi-cally the same at 1.60-1.61 or the 2008 peak, over time. However, thesharp rally over the past 1 year has created an overbought conditionthat is probably in need of consolidation. The September breakout and30-week ma at 1.4450-1.45 provides solid initial support on pullbacks.Secondary support remains at 1.42-1.43 or the 10 and 30-month ma.The prior key breakout of a cup and handle pattern at 1.3668-1.3812offers intermediate-term support.

Yen-dollar Late last year the JPY/USD finally broke out above the topof its 10-year ascending triangle pattern. This breakout above key resis-tance near 9.8328-9.8619 or the January 2005 and December 1999highs is technically significant as this reaffirms a bullish longer-termtrend and suggests higher prices. We continue to believe JPY/USD willreturn to 12.2150-12.5367 or the April/May 1995 highs, over time. Onthe downside JPY/USD is overbought and may need to consolidate gainsbefore staging another sustainable rally. We will recommend raising ini-tial trading support to 11.0187 or the December low. Violation heremay trigger additional selling to secondary support at 10.8315- 10.8973or the July high and October low. The 10-month ma at 10.7478 pro-vides further support on pullbacks. 10.0331-10.3123 or March/May/Julybottoms represent intermediate-term support. The 30-month ma nowresiding near 9.9435 offers longer-term investment-term support.

Swiss franc-dollar The Swiss franc has also managed to move convinc-ingly above its prior major technical breakout above .8861-.8990 coin-ciding with the December 2004 and April 1995 highs this year. This re-

US Dollar Index

Monthly Linear Regression Band Study with 2-standard dev





Euro-Dollar

Monthly Chart with 10 and 30-week Moving Averages

Yen-Dollar

Monthly Chart of Yen * 1000 with 10 and 30-month ma

Swiss Franc-Dollar

Monthly Chart with 10 and 30-month ma


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affirms a large ascending triangle pattern renders intermediate-termtargets to 1.0110-1.0279 or the April/March 2008 highs. We believeSwiss Franc has recently achieved this projection as it recorded highs of1.0035-1.0085 during November/December. Based on current over-bought condition a sharp pullback below its 10-week ma we now ex-pect this correction to continue down to .9450-.9569 or Septemberbreakout, 30-week ma and October low. The ability to find support mayhelp to alleviate extended technical conditions setting the stage for an-other rally towards the November/December peaks. On the other hand,

if sellers continue to take profits then Swiss Franc can once again returnto the top of the multi-year ascending triangle breakout at .8861-.8990,over time.

Commodities MarketCRB Index Speculation and momentum buying propelled the CRB In-dex to unsustainable levels during first half of 2008 as it traded to 4-standard deviation above its norm or to a record high of 474 on July2008. In seven years the commodities market has recorded gains of159%. This was not sustainable and commodity prices and almost allfinancial assets with lone exception of US Treasuries soon unraveled asthe credit crunch imploded during September of 2008. CRB Indexquickly reversed direction and fell below the top of its regression band,the middle of its band at 302 and finally find support slightly below thebottom of its regression band at 200.34 during March 2009. We believethe rally was too extreme to the upside during 2008 and believe thedecline during March 2009 was also too extreme to the downside. It isour contention that in the future CRB Index will seek to establish newsustainable trading ranges. CRB is now projected to return to the mid-point of its long-term regression band or to its statistical equilibriumlevel at 301.50. It is interesting to note that the 38.2% retracementfrom 2008 high to 2009 also coincides with 304.76. A convincing surgeabove this key supply zone can extend the commodities rally towards50% retracement or 337.06. The 61.8% retracement at 369.37 pro-vides longer-term resistance. On a near-term basis, CRB Index appears

to trading in sympathy with many other financial markets as it seems tobe stuck in a trading range between 264-267.5 on the downside and280-285 on the upside. A convincing surge above 285 renders upsidetargets to the 300-305. A convincing break of 264-267.5 opens thedoor for a correction down towards 245-248 or very close to its 10-month ma at 253 and the extension of its 20+ year downtrend break-out channel near 250.Crude Oil This important energy commodity traded slightly above the5-standard deviation band when it peaked on July 2008 at 147.27. Theensuing decline was equally explosive as it fell quickly to key invest-ment support at 33.20 corresponding to a major 1998 uptrend. Therally from the January/February lows has now stalled near key supply at80-82 or the 30-month ma. We believe a consolidation phase is nownecessary to alleviate an overbought condition. However, crude oilneeds to quickly find support near its 10-month ma and Au-gust/September lows near 65-67. 55-58 or the May breakout, middle ofregression band and the July low provide further key support. The abilityto find support near 65-67 coupled with a convincing surge above 74-75 or prior October breakout helps to reestablish the recent cyclical bullrally. The next key challenge is to breakout above 80-82 as this rendersupside targets to 86-90 or the 50% retracement and the top of itsmonthly regression band. The 61.8% retracement at 103.70 is optimis-tic and possible only under ideal market conditions.

Gold Two bullish patterns have been recently confirmed that suggesthigher targets for this precious metal. A shorter-term 7-month symmet-rical triangle breakout during August/September above 980 renders

near-term upside targets to 1,150 which was recently achieved. The lar-ger 2-year head and shoulders bottom breakout above 1,008 projectstargets to 1,350-1,375, intermediate-term. We expect gold will likelytrade towards this projection as early as the first half of 2010 with or

Commodities Index

Monthly Linear Regression Study of RJ/CRB Index




Crude Oil Light Sweet

Monthly Linear Regression Study of Crude Oil

COMEX Gold

Weekly Chart with 10 and 30-week Moving Averages


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without the help of the declining US Dollar. It also appears that a para-bolic move similar to that of the August 1976 to January 1980 rally maybe replicated if widespread speculation develops further. If you recallduring the last 1976-1980 speculative rally gold jumped from a low 101to a record high of 873 or appreciated 764% over 4 years. In the proc-ess, gold gained exactly 8.64 times its initial value during this timeframe. If gold replicates this prior rally then gold can be expected to ap-preciate from February 2001 low of 255.10 to a hypothetical high of2,205. On a near-term perspective, gold is moderately trading to a re-

cent record high of 1,227.5 on 30 November. The recent selling appearsto be subsiding as gold nears it initial support near 1,100-1,109 or its10-week ma. Additional secondary support is also available near 1,000+/- 15 or prior breakout, 10-month ma and the 30-week ma. Under se-vere selling gold can fall as low as 865-905 or the left/right shouldersand 30-month ma. Relative strength analysis between gold and crudeoil versus CRB still suggests both commodities


CRB Index versus Gold and Crude Oil

Indexed Relative Strength Chart of CRB between Gold &

U.S. Treasury YieldsU.S. Treasury Yield Curve Since the late-1980s US Treasury yieldshave been an excellent indicator of risk aversion. For example, Treasuryyields experienced sharp declines in 1990-1992, 1994-1995, 1997-1998, 2000-2003 and recently 2007-2009. Each of these periods coin-

cided with rapidly declining interest rates due to internal/externalevents and/or financial/economic crisis. For instance, during 1990-1992timeframe the Japanese stock/real estate market sustained speculativebubble bursts, first Gulf War, and the Latin American financial crisis ledto flight to safety. Once again, during 1994-1995 or the OrangeCounty financial crisis investors gravitated to Treasuries. During theemerging market crisis of 1997-1998 investors again sought out USTreasuries. During the 2000-2003 Tech/Telecom bubble burst, inves-tors once more turned to the defensive nature of the fixed incomemarket. Most recently, the real estate, credit crisis and financial turmoilthat started on 2007 has led to another dramatic downturn in Treasuryyields. We believe the long-end of the Treasury yield curve is now re-sponding to a recovery as 10 and 30-year yields have jumped 200+basis points this year and may continue to appreciate next year.

US Treasury Yield Spreads During the second half of 2006 thespreads between 10-year and 2-year Treasury yields contracted to anunsustainable level of -0.15 (11/06). This soon led the start of a majortrend reversal as spreads began to expand sharply. Over the past twoyears yields has widen to a current extreme level of 2.697 exceedingthe highs of 1992 and 2003. It is possible that spreads may continueto expand further into early 2010 due to long-end of the yield risingfaster than the short-end. However, as in past cycles these yieldspreads tend to expand rapidly for nearly three years before the onsetof a sharp contraction. We are now currently in the third year of itsyield expansion cycle. We expect the shorter-end the yield curve willbegin to rise next year in anticipation of the Fed moving towards a

more restrictive monetary policy. If the yield spread begins to fall be-low 2.35-2.50 or the September/October low this may warn of thestart of a contraction cycle. However, we believe this spread must falldecisively below 1.875-2.05 or the March low and possibly below1.356-1.469 or the June/December 2009 low before the intermediate-term trend reverses to a deeper contraction leading to the possibly of amajor correction in stocks.

10-year Treasury Yield (TNX) A well established 25-year secular long-term downtrend channel on TNX remains intact. Note that buying op-portunities developed near the top of its monthly regression bands(i.e., 1987, 1989/1990, 1994, 2000 and recently on 2006/2007). Con-versely, selling occurred near the bottom of the regression bands (i.e.,1986, 1993, 1998, and 2003). A convincing decline below 1.88%-

2.04% signals a deflationary cycle. On the other hand, a convincingsurge above 4.65%-5.0% signals the potential for inflationary cycle.On near-to-intermediate term basis we note a rare fan formation. Abreakout above the third downtrend at 3.7%-3.9% signals an inter-

U.S. Treasury Yields

US Treasury Yield Curve from 1988 to Present




10-year Treasury Yields Minus 2-year Yields

Monthly Spread Analysis between 10 and 2-year Yields

10-year Treasury YieldsMonthly Regression Study of 10-year Treasury Yields

Top = 4.64%

Middle = 3.26%

Bottom = 1.88%


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mediate-term trend reversal to higher yields. Also note that a 2-yearhead and shoulders bottom pattern has quietly developed. A convinc-ing surge above 3.9%-4.0% confirms neckline breakout and warns ofhigher rates. The 3.05%-3.20% now provides initial support. A deci-sive move below this support zone would alert us to the resumption ofthe secular downtrend to 2.5%-2.6% and possibly back to 2.04% orDecember 2008 low.

2-year Treasury Yield A similar monthly regression analysis also con-

firms a well established downtrend channel. The 2-year Treasury yieldis very sensitive to Fed actions and a good barometer of credit liquidity.We believe major Fed monetary policy changes will be reflected by ma-jor turns in 2-year yields. It does not appear that fixed income investorsare overly concern that the Fed will tighten any time soon. The 2-yearhas to move above 1.0%-1.10% before short-term rates can recoverto 1.37%-1.44% or June/August highs. Above 1.89%-2.06% or the30-month ma and mid-point of its regression band signals a major in-termediate-term trend reversal higher.

2-year Treasury Yields

Monthly Regression Study of 2-year Treasury Yields

Top = 4.63%

Middle = 2.06%

Bottom = -.51%



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aUBS Wealth Management Research / 14 December 2009

bStatement of RiskStock market returns are difficult to forecast because of fluctuations in the economy, investor psychology, geopolitical conditionsand other important variables.

AppendixStock Recommendation System

Analysts provide a relative rating, which is based on the stocks total return potential against the total estimated return of theappropriate sector benchmark over the next 12 months.

Industry Sector Relative Stock View

Outperform (OUT) Expected to outperform the sector benchmark over the next 12 months.Marketperform (MKT) Expected to perform in line with the sector benchmark over the next 12 months.Underperform (UND) Expected to underperform the sector benchmark over the next 12 months.

Under reviewUpon special events that require further analysis, the stock rating may be flagged as "Under review" by the analyst.

RestrictedIssuing of research on a company by WMR can be restricted due to legal, regulatory, contractual or best business practice obli-gations which are normally caused by UBS Investment Bank's involvement in an investment banking transaction in regard tothe concerned company.

Sector bellwethers, or stocks that are of high importance or relevance to the sector, that are not placed on either the outper-form or underperform list (i.e., are not expected to either outperform or underperform the sector benchmark) will be classifiedas marketperform. Additionally, when stocks that are not deemed to be of high importance or relevance to the sector are notexpected to outperform or underperform the sector benchmark, they will simply be removed from the lists and will not be as-signed a WMR rating.

UBS Financial Services Inc. Technical Research Dept.: Definitions and Distribution

UBS Financial Services Rating Definition and criteria Corresponding Rating

Category

BullishWell-defined, reliable up-trend, an increase in the rate of change (or strong mo-mentum) and confirming technical indicators

Buy

Mod. Bullish Positive overall trend, momentum and confirming technical indicators Buy

Neutral Trading range trend, a flat rate of change and confirming technical indicators Hold

Mod. Bearish Weakened trend, momentum and confirming technical indicators Sell

Bearish Negative trend, momentum and confirming technical indicators Sell

N/A Not enough historical data to make an evaluation. N/A


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Appendix

Disclaimer

In certain countries UBS AG is referred to as UBS SA. This publication is for our clients information only and is not intended as an offer, or a so-licitation of an offer, to buy or sell any investment or other specific product. It does not constitute a personal recommendation or take into ac-count the particular investment objectives, financial situation and needs of any specific recipient. We recommend that recipients take financialand/or tax advice as to the implications of investing in any of the products mentioned herein. We do not provide tax advice. The analysis con-tained herein is based on numerous assumptions. Different assumptions could result in materially different results. Other than disclosures relatingto UBS AG, its subsidiaries and affiliates, all information expressed in this document were obtained from sources believed to be reliable and ingood faith, but no representation or warranty, express or implied, is made as to its accuracy or completeness. All information and opinions arecurrent only as of the date of this report, and are subject to change without notice. This publication is not intended to be a complete statementor summary of the securities, markets or developments referred to in the report.

Opinions may differ or be contrary to those expressed by other business areas or groups of UBS AG, its subsidiaries and affiliates. UBS WealthManagement Research (UBS WMR) is written by Wealth Management & Swiss Bank and Wealth Management Americas. UBS InvestmentResearch is written by UBS Investment Bank. The research process of UBS WMR is independent of UBS Investment Research. As a conse-quence research methodologies applied and assumptions made by UBS WMR and UBS Investment Research may differ, for example, in termsof investment horizon, model assumptions, and valuation methods. Therefore investment recommendations independently provided by the twoUBS research organizations can be different.The analyst(s) responsible for the preparation of this report may interact with trading desk personnel, sales personnel and other constituencies forthe purpose of gathering, synthesizing and interpreting market information. The compensation of the analyst(s) who prepared this report is de-termined exclusively by research management and senior management (not including investment banking). Analyst compensation is not basedon investment banking revenues, however, compensation may relate to the revenues of UBS as a whole, of which investment banking, sales andtrading are a part.

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Appendix

Disclaimer (continued)

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