S&P 500 Sector Rotations and Relative Performances

Peter Lee – Chief Technical Strategist CIO Wealth Management Research

This report has been prepared by UBS Financial Services Inc. (“UBS FS”). All charts and data are sourced from Thomson Reuters and UBS CIO WMR as of 14 March 2014

17 March 2014

1

Stock Market Psychology – Fear, Greed, and Hope

Optimism

Excitement

Thrill

Greed/Euphoria – 1st Half 2007

Anxiety

Denial

Fear – 1st Half 2008

Desperation

Panic

Capitulation

Despondency – 4th Qtr 2008

Depression – 1st Qtr 2009

Hope

Relief

Optimism – 1st Qtr 2012

Are we here?

Greed/Euphoria – 2014

Excitement

Thrill

2nd Half 2015

1st Half 2015

2016/early 2017

2

4 Stages of a Bull Rally

Accumulation (Stealth) Phase Awareness Phase

Mania/Speculative/Melt Up Phase

Smart Money – Insiders, Contrarians, and Deep Value Investors

Blow off Phase

Time

Stage I – 2009 to 2010

First deep correction

Price

Delusion

Bear Trap

Media/Press Attention

Are we here?

"New Paradigm"

Optimism

Greed

Stage II – 2011 to 2013

Institutional Money – Professional traders, Money Managers, Hedge Funds, and etc.

Public Money - Retail Investors

Return to "Normal"

Denial

Bull Trap Fear

Despair

Capitulation

Historical Mean

Return to the Mean

Acceleration

Stage III – 2013 to 2014 Stage IV – 2015 to 2016?

3

US Economic/Business Cycle, Sector Rotation & Duration

Early Expansion

Middle Expansion

Late Expansion

Early Contraction

Late Contraction

Transportation

Technology

Services

Capital Goods Industrials

Basic Materials

Energy

Consumer Staples

Utilities

Financials

Consumer Cyclicals

Early Expansion – 12 to 18 months

Inflation = Continues to fall

Interest Rates = Bottoming out

Middle Expansion –12 to 18 months

Inflation = Bottoming out

Interest Rates = Rising modestly

Late Expansion – 12 to 18 months

Inflation = Rising

Interest Rates = Rising rapidly

Early Contraction – 6 to 9 months

Inflation = Rising less strongly

Interest Rates = Peaking

Deep Contraction – 6 to 9 months

Inflation = Flat to Declining

Interest Rates = Falling

1 complete cycle – 48 to 72 months

or 4 to 6 years March 2009 2015-2016? 2014

Healthcare

4

Global Markets/QE Programs/9-inning Baseball Game Analogy

2nd to 3rd Inning

4th to 5th Inning European Equities – MSCI EMU Index ECB LTRO program – Long Term Refinancing Operation 2-stage program – stage 1 (12/21/11) and stage 2 (2/28/12)

Start of the Game (recovery) – (3/09)

Emerging Markets Equities - (MSCI Emerging Markets Index)

Japanese Equities - Nikkei 225 Index

Bank of Japan – Kuroda and Prime Minister Abe Asset Purchase program – 4/13

US Equities - SPX Index

TARP - Troubled Asset Relief Program (10/08), QE1 (11/08), QE2 (11/10), Operation Twist (9/11), QE3 (9/12 and 1/13) , QE3 Tapering announced (12/13)

End of the Game – Bottom of the 9th Inning – (???)

7th to 8th Inning?

1st Inning

5

S&P 500 Sectors – Relative Performance from 3/6/09 (666.79)

From the March 2009 market bottom or the beginning of Stage I of the Bull rally or the

Accumulation (stealth) phase smart money began to buy into the new leadership sectors (Consumer Discretionary, Industrials and Technology) as well as the battered sectors (Financials) from 20070-2009 decline. They avoided the former leaders

(Energy and Materials) from the prior 2002-2007 bull rally and the defensive sectors (Utilities,

Telecom Services and Consumer Staples).

Consumer Discretionary

Financials

Energy

Industrials

Info Technology

Materials

SPX

Healthcare

Consumer Staples

Utilities

Telecom Services

6

S&P 500 Sectors – Relative Performance from 10/4/11 (1,074.77)

Since the October 2011 bottom or into heart of Stage II or the awareness phase of the Bull rally Institutional investors

broaden their buying by sponsoring economic sensitive sectors (Consumer Discretionary and Industrials). They also

favor a financial recovery via Financials and began to accumulate Healthcare as a way to play the growth call.

They avoided most of the defensive sectors such as Telecom Services, Utilities and Consumer Staples.

Consumer Discretionary

Financials

Healthcare

Energy

Industrials

Materials

SPX

Info Technology

Consumer Staples

Utilities

Telecom Services

7

S&P 500 Sectors – Relative Performance from 6/24/13 (1,560.33)

As can be expected, since the June 2013 bottom or the start of Stage III or the Mania phase of the Bull rally the S&P

sectors that have outperformed SPX are heavily concentrated in economically sensitive groups with the lone exception of S&P Healthcare which is a momentum, growth call. Remember at this stage the Media/Press have already touted the global economic recovery call as well and retail

investors are now returning to the marketplace as they fear missing the move. Note that at the matured phase of a

major bull rally the deeper cyclical sectors and momentum/growth securities tend to dramatically

outperform SPX but will soon begin to lose leadership to the defensive sectors and the market breadth begins to

narrowed as the market nears its peak.

Healthcare

Industrials Materials

Consumer Discretionary Info Technology

Financials

SPX

Energy

Utilities

Consumer Staples

Telecom Services

8

S&P Sectors Ratio Analysis – S&P 500 Financials and Energy

Higher highs on Financial Sector is

keeping pace with the higher highs on SPX.

A Fan formation breakout may signal a sustainable recovery basically in line

performance against SPX.

Lower highs on Energy sector confirms a negative divergence to SPX.

Major multi-year breakdown warns of an extreme underperformance over

the intermediate term basis.

9

S&P Sectors Ratio Analysis – S&P 500 Consumer Discretionary and Consumer Staples

Oversold condition is developing. A successful test

of the 2011 bottom may trigger a technical rally back

to the prior break down.

Higher highs on the S&P Consumer Staples remains intact but a potential top may be developing as the

relative strength has dramatically deteriorated.

Higher highs on S&P Consumer Discretionary suggests that

although the March 2009 rally is maturing it is still sustainable,

intermediate term.

It appears the recent Jan-Feb weakness may hint of a

consolidation/corrective phase rather than a major top.

10

S&P Sectors Ratio Analysis – S&P 500 Healthcare and Utilities

Although higher prices are still possible, over time S&P Healthcare

sector is extended/overbought. Recent failure to breakout above 2009

uptrend channel may signal a consolidation back to its prior relative

strength breakout levels.

Is the improving relative strength in S&P Utilities over the past 2 months a

reflection of selling pressure temporarily subsiding? Or is this a selling

climax/capitulation? An oversold rally is possible back to prior breakdown.

However, it is too early to confirm a sustainable intermediate term recovery.

11

S&P Sectors Ratio Analysis – S&P 500 Materials and Technology

The 2011 downtrend breakout as well as a secondary breakout above prior breakdown support the basis for a recovery to the 2012 highs.

Higher highs in S&P Materials still

suggest a sustainable rally.

A successful triangle pattern breakout had led to an intermediate term recovery.

However, it is still trading below its prior breakdown thereby suggesting continued

selectivity in this group.

Higher highs indicates investors are still

interested in the S&P Technology sector but

relative strength is showing mixed readings

12

S&P Sectors Ratio Analysis – S&P 500 Industrials and Telecom

A recent failure to surpass its 2010 highs has triggered a near term correction over the past two months. A pullback to the prior 2013 breakout be a key test of support.

Lower lows in S&P Telecom Services sector and negative divergence to SPX

warn of continued selling pressure.

Relative strength breakdown last year and further selling to the start of the New

Year shows no signs of abating.

13

S&P 500 Sectors – Relative Strength for Energy and Materials

Since Oct 2013 bottom S&P Energy Sector has negatively diverged from SPX from a relative

performance perspective as evident by the lower lows (Energy) versus higher highs (SPX) . However,

a potential head/shoulders bottom, if confirmed, suggests the severe Energy underperformance may

begin to subside, near term.

Despite the recent negative sentiments in the commodities arena, the S&P Materials has

surprisingly kept up with the SPX. In fact, since Oct 2013 low the higher highs and higher lows closely track the SPX performance, at least on a

near-term basis.

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S&P 500 Sectors – Relative Strength for Industrials and Consumer Discretionary

The S&P Industrials sector appears to be leveling off after a sharp earlier in the year but still retains a slightly rising higher high formation. This recent decline hints of a consolidation phase to alleviate an overbought condition before the resumption

of the outperformance cycle.

Similar to S&P Industrials sector the S&P Consumer Discretionary sector retains its higher high

formation thereby suggesting that the Jan-Feb pullback is a minor correction within an over all

outperformance cycle.

S&P 500 Sectors – Relative Strength for Consumer Staples and Healthcare

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The S&P Healthcare sector retains its higher high formation thereby suggesting the recent Mar

2014 downturn is an overbought condition and a consolidation phase within a continued primary uptrend. However, note that given the extent of the prior rally it is reasonable to expect a deeper correction than normal possibly back to the Jan

2014 reaction high.

Consumer Staples sector is diverging against its price chart since Sep/Oct 2013 timeframe. Although it has not violated its Sep/Oct 2013 lows a series of

lower lows warns of a loss of leadership and hence underperformance against S&P peers.

S&P 500 Sectors – Relative Strength for Financials and Information Technology

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Headed into Year End 2013 S&P Financials sector closely tracked SPX. However, in the past 2 months it appears that S&P Financials

are slightly weaker than SPX as it has recently slipped below its Jan 2014 highs.

S&P Technology sector is confirming its higher highs from both a price and relative strength

perspectives. Although it has slipped in recent weeks the ability to maintain its prior breakout

allows for an outperformance cycle.

S&P 500 Sectors – Relative Strength for Telecommunication Services and Utilities

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The S&P Telecom Services sector remains one of the worst S&P sectors last year and this

trend continues into the New Year. There is no signs of a sustainable recovery yet.

The near term technical picture for the S&P Utilities is beginning to show early signs of

stabilization as evident by a technical breakout in in early Feb 2014 and a

subsequent retest of this breakout in early March 2014. Is the recent relative strength improvement in S&P Utilities indicating US interest rates will be more muted this year?

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Contact Information

UBS Financial Services Wealth Management Research NY, NY 10019 www.ubs.com

Peter Lee UBS Financial Services Inc. peter.lee@ubs.com 212-713-8888 Ext 01