Technical Market Outlook

Peter Lee – Chief Technical StrategistWealth Management ResearchAugust 2010

* Charts courtesy of Reuters Bridge and Bloomberg.

** This report has been prepared by UBS Financial Services Inc.

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1

Major Technical Trends – SPX Index Secular Trend (8-20 years) – Sideways Trading Range Trend

March 2009 marked the mid-point of a long-term secular trading range market. We can expect another 5-10 years of sideways trading before the start of the next long-term Secular Bull trend in US Equities.

Primary Trend (1-3 years) – Cyclical Recovery/Cyclical Bull Trend intactEntering into the midpoint of the March 2009 Cyclical Bull trend. This ensuing Cyclical Bull rally may sustain until 2011. 2010 price target to 1,220-1,230 has been achieved. However, 2011 projection to 1,348-1,362 still remains intact.

Intermediate Trend (3-12 months) – Cyclical Bull consolidation phaseThe 17% correction from April 2010 peak to July 2010 low has now set into motion a sideways trading range market environment. This consolidation helps to alleviate the overbought conditions (gains of 83% gains) allowing for resumption of March 2009 Cyclical Bull later in the year.

Short-term Trend (1 week-3 months) – Nearing an Inflection PointAnother 4-year mid-term Election Year low is likely to develop over the next 1-3 months. However, SPX is now nearing an inflection point. The outcome of the battle between the bulls and the bears will help decide next major trend.

2

Psychology of the 2007-2009 Bear Market Psychology of a Bear Market coincides with the 5 Stages Grief

Elisabeth Kubler-Ross, MD 1969 book – On Death and Dying

Stage 1 – Denial – Early 2007 (i.e., HSBC and Barclays Bank were the first global banks to report sub-prime write downs)

Stage 2 – Anger – 2nd Quarter to 3rd Quarter 2007 (i.e., 2 Bear Stearns Hedge Funds collapsed & sharp losses from Goldman Sachs - Quant Fund)

Stage 3 – Bargaining/Negotiation – End of 2007 to 1st half of 2008 (i.e., FED Easing, initiation of the TARP bailout plan)

Stage 4 – Depression – (i.e., week of Sept 15 2008 – Lehman Brothers bankruptcy, Merrill Lynch sold to BAC, and AIG bailout) – Institutional investors capitulated

Stage 5 – Acceptance (i.e., Jan 2009 to March 2009) – Market Capitulation –Selling Climax phase – Retail investors also capitulated

A new Cyclical Bull rally began on March 2010 – Middle of the cycleIf Cyclical Bull is at midpoint then this rally can sustain until 2011

3

1

10

10 0

1,0 0 0

10 ,0 0 0

SPX Index – Secular Trends -Brave New World reportSPX Index 1900 - Present

Secular Bear Trading Range

1906-1921

Secular Bull 1921-1929

Secular Bear Trading Range

1929-1949

Secular Bull 1949-1965

Secular Bear Trading Range

1966-1982

Secular Bull 1982-2000

Secular Bear Trading Range 2000-Present

4

SPX Index – Long-Term Secular Trend Outlook

1942 Uptrend = 645

1932 Uptrend = 395

____ 1942 Uptrend = 645

1932 Uptrend = 395

____

1942 Uptrend = 650

1932 Uptrend = 400

____

The bears favor the 1932 uptrend (green line 400). We favor the 1942 uptrend (red line 650). This suggests another retest of the rising red uptrend is likely as early as 2012 and possibly at a higher than March 2009 bottom.

5

Similarities – DJIA 1966 to 1982 and SPX 1997 to Present

1997 - Present

Head and Shoulders Bottom???

Midpoint = 1,120-1,160

1966 - 1982

16-year Head and Shoulders Bottom

Midpoint = 820-830

8 years to form right shoulders

8 years to form left shoulders

10 years to form left shoulders

Another 5-10 years to form right shoulders?

6

SPX Index – Positive/Negative Outside Month Reversal

Positive Outside Month = Emerging Market Crisis – Oct 98

Positive Outside Month = Tech/Telecom Bubble – Mar 03

Positive Outside Month = Real Estate, Credit, Deleveraging and Global Financial Crisis – Jul 09

Positive Outside Month Bullish Negative Outside Month Bearish

No Positive Outside Month on July 2010

Oct 1999

Positive Outside Months = Oct 04/Jul 05/Jan 06

Negative Outside Months = Jan, Jul, and Sep 2000

Negative Outside Months = Feb/Jul 2007

Negative Outside Months = Mar 04/Mar 05/May 05

Negative Outside Month = Jan 2010

Negative Outside Month = Jan 2009

Monthly Death Cross Sell April 2001 and July 2008

Monthly Golden Cross on Jun 2010

Monthly Golden Cross Buy on Jan 2004

7

4-Year Mid-term Election/10-year Decennial Year/Jan Barometer/Pre-Election Year Cycles Are All ConvergingMid-term SPX Yearly Intra-YearElection Returns Corrections

1930 -28.5% -44.3%1934 -4.7% -29.3%1938 24.6% -28.9%1942 12.4% -17.8%1946 -11.9% -26.7%1950 21.7% -14.0%1954 45.0% -4.4%1958 38.1% -4.4%1962 -11.8% -26.9%1966 -13.1% -22.2%1970 0.1% -25.9%1974 -29.7% -37.6%1978 1.1% -13.6%1982 14.8% -16.6%1986 14.6% -9.4%1990 -6.6% -19.9%1994 -1.5% -8.9%1998 26.7% -19.3%2002 -23.4% -33.8%2006 13.6% -7.7%2010 ??? ???Avg. (20) 4.1%(ex div) -20.6%1930-2009 7.13%(ex div) -21.89%

Decennial SPX Yearly Intra-YearYear (0) Returns Corrections1930 -28.5% -44.3%1940 -15.1% -29.6%1950 21.7% -14.0%1960 -3.0% -11.5%1970 0.1% -25.9%1980 25.8% -17.1%1990 -6.6% -19.9%2000 -10.1% -17.2%2010 ??? ???Avg. (8) -2.0% -22.4%

Jan SPX Year Down Jan Jan Close low Market

1953 -6.6% -0.7% -13.9% Bear

1956 2.6% -3.6% 0.9% Flat

1957 -14.3% -4.2% -12.8% Bear

1960 -3.0% -7.1% -6.0% Bear

1962 -11.8% -3.8% -24.0% Bear

1968 7.7% -4.4% -4.9% Cont. Bear

1969 -11.4% -0.8% -13.4% Bear

1970 0.1% -7.6% -18.6% Cont. Bear

1973 -17.4% -1.7% -20.6% Bear

1974 -29.7% -1.0% -35.5% Bear

1977 -11.5% -5.1% -11.1% Bear

1978 1.1% -6.2% -2.6% Cont. Bear

1981 -9.7% -4.6% -13.0% Bear

1982 14.8% -1.8% -14.9% Cont. Bear

1984 1.4% -0.9% -9.5% Flat

1990 -6.6% -6.9% -10.2% Bear

1992 4.5% -2.0% -3.5% Flat

2000 -10.1% -5.1% -9.3% Bear

2002 -23.4% -1.6% -31.3% Bear

2003 26.4% -2.7% -6.4% Cont. Bear

2005 3.0% -2.5% -3.7% Flat

2008 -38.5% -6.1% -46.3% Bear

2009 23.46% -9.4% -28.6% Cont. Bear

2010 ??? -3.7% ??? ???

Avg(24) -4.7% -3.9% -14.7%

24 Down Januarys 13 SPX down Yrs and 10 up Yrs

Mid-term DJIA Pre- DJIA GainsElection low Election Yr Hi low-hi / Year

Jul 1914 Dec 1915 89.6% / 87.1% Jan 1918 Nov 1919 63.0% / 30.5%Jan 1922 Mar 1923 34.1% / -3.3%Mar1926 Dec 1927 49.7% / 28.8%Dec 1930 Feb 1931 23.4% / -52.7%Jul 1934 Nov 1935 73.6% / 38.5%Mar 1938 Sep 1939 57.6% / -2.9%Apr 1942 Jul 1943 56.9% / 13.8%Oct1946 Jul 1947 14.5% / 2.2%Jan 1950 Sep 1951 40.4% / 14.4%Jan 1954 Dec 1955 74.5% / 20.8%Feb 1958 Dec 1959 55.5% / 16.4%Jun 1962 Dec 1963 43.2% / 17.0%Oct 1966 Sep 1967 26.7% / 15.2%May 1970 Apr 1971 50.6% / 6.1%Dec 1974 Jul 1975 52.7% / 38.3%Feb 1978 Oct 1979 21.0% / 4.2%Aug 1982 Nov 1983 65.7% / 20.3%Jan 1986 Aug 1987 81.2% / 2.3%Oct 1990 Dec 1991 34.0% / 20.3%Apr 1994 Dec 1995 45.2%/ 33.5%Aug 1998 Dec 1999 52.5% / 25.2%Oct 2002 Dec 2003 43.5% / 25.3%Jan 2006 Oct 2007 1.26% / 6.43%??? 2010 ??? 2011 ???

Avg. (24)May Sep(15.5 mo) 47.8% / 15.1%

8

3 Possible Scenarios for SPX during the 2nd half of 2010

Scenario 1 = Trading range between 1,010-1,040 and 1,131-1,150

Probability = 40% (increases to 50+% on failed breakout)

This Neutral call is the street consensus view. Investors lack the conviction to commit aggressively to marketplace (i.e., either net long or net short) creating a choppy trading range market. Increases to 50+% on repeated attempts to breakout above 1,131-1,150.

Scenario 2 = Correction resumes leading to a marginal new low (950)

Probability = 30% (increases to 40% on confirmed breakdown)

This defensive call is based primarily on the fear of tail risk. Bearish camp points to the unresolved sovereign debt problem in Greece, repeat of May 6th flash crash, China slowdown, double dip recession, and geopolitical events around the world. Probability increases to 40% on confirmed breakdown below key support at 1,010-1,140.

Scenario 3 = Market melts-up to marginal new highs (1,220-1,1250)

Probability = 30% (increases to 40% on breakout & falls to 20% on breakdown)

This is the contrarian view on the Street. Breakout above key supply at 1,131-1,150increases the probability to 40% as sideline money and shorts are forced back into marketplace. This breakout also negates a large 10-month head/shoulders top, confirms a 4-month head/shoulders bottom, and validates the July 1st low of 1,010.91 as a Mid-term Election Year bottom. Projections 1,220-1,250 (2010) and 1,348-1,362 (2011)

9

SPX Index – Longer Term Outlook (1+ year)

Although SPX has rallied 82.94% from Mar 2009 low achieving our 2010 target of 1,220-1,230 during Apr 2010, we still believe there remains unfinished business to the upside. Based on the Aug 2009 neckline breakout above 1,007.51 as well as the 76.4% retracement from 2007-2009 decline this would imply upside technical targets to 1,348-1,362 possibly as early as 2011. If we are remotely correct with this forecast SPX is now headed towards the mid-point of its Mar 2009 cyclical bull rally. The Apr to Jul 2010 correction (-17.13%) may be a healthy consolidation phase that is necessary to the resumption of the cyclical bull later in the year. Nonetheless, we expect volatility to remain high into Mid-term Elections in Nov 2010. Key initial support now moves up to 1,040-1,060 or the Feb/May/early-Jun/Mid-Jul 2010 bottoms. 1,008-1,011 or Nov 2008 Election Day high, 38.2% retracement from 2009-2010 rally and Jul 2010 low represents key secondary support. The Jul 2009 head/shoulders breakout at 943-956 continues to offer pivotal intermediate-term support corresponding to the prior July 2009 neckline breakout, 50% retracement from 2009-2010 rally, and extension of 2007 downtrend. On the upside, near-term supply is at 1,031-1,050 coinciding with the Jan/Jun 2010 highs. Above this supply renders a retest of 1,173.57 or May 13th high and then to 1,220-1,230 or Apr 2010 reaction high and 61.8% retracement from 2007-2009 decline.

March 2009 Cyclical Bull rally remains intact. However, consolidation is still necessary.

61.8% = 1,228.74

50% = 1,121.44

38.2% = 1,014.14

Mar 09 low = 666.79 Jul 09 low = 869.32 Nov 09 low = 1,029.38 Feb 10 low = 1,044.50 July 10 low = 1,010.91

2010 target 1,220-1,230

2009 target 1,121

Jan-Jul 2009 high = 944-956

76.4% = 1,361.50

2011 target? 1,348-1,362

10-month ma = 1,108 30-month ma =1,071

Nov 2008 high = 1,007.51

10

SPX Index – Intermediate-term Outlook (3-12 months)

July 09 neckline breakout = 944-956

July 09 low = 869.32

A negative outside week pattern during the week of April 26th coupled with violation a rising wedge pattern during May 2010 flash crash confirmed an intermediate-term top. This breakdown quickly led to a sharp decline as SPX fell to 1,010.91 or within striking distance of its key support associated with 1,008-1,009 or the 38.2% retracement from Mar 2009 to Apr 201 rally or 1,008.55 and Nov 2008 Election Day high at 1,007.41. The ability to find support here is constructive as this signals the start of a consolidation phase. The July 19th positive outside week pattern helps to reinforce this backing and filling process. Nonetheless, still needs to convincingly breakout above crucial supply at 1,131-1,150 corresponding to the top of its June 21st negative outside week, Jan 2010 high, and 150-day/200-day/30-week moving average to confirm a major bottom and the resumption of Mar 2009 cyclical bull rally.

Feb/May lows = 1,040.78-1,044.50 July 1st low = 1,010.91

Mar 09 low = 666.79

Jan high = 1,150.45

10-week ma = 1,089 30-week ma = 1,116

Rising Wedge Formation?

Mar 2009-Apr 2010 Retracements

38.2% = 1,008.5550% = 943.2961.8% = 878.0476.4% = 797.30

April high = 1,219.80 April 26/June 21 = Negative

Outside Weeks

Nov 2008 high = 1,007.51

July 19 = Positive Outside Week

11

SPX Index – Shorter-term Outlook (1-3 months)

A 10-month head and shoulders top pattern and the rolling (trending down) of key moving averages warns of a potential top. Although oversold rallies are possible, we believe SPX is still vulnerable for volatile swings over the next 1-3 months. Repeated failures to clear above 150-day ma as well as the left/right shoulders at 1,131-1,150 solidifies the 10-month head/shoulders top formation. Initial support moves up to 1,085-1,107 and then to 1,040-1,057 or the prior Feb/May/early-Jun/mid-Jul 2010 bottoms. Violation here sets into motion a retest of July lows at 1,010.91 or neckline support. Below Jul bottom confirms head and shoulders top and renders downside targets to 944-956 and then to 869-878 or the July 2009 low, 61.8% retracement from 2009-2010 rally as well as the measured technical projection based on 10-month head/shoulders top breakdown. Key supply remains at 1,131-1,150, 1,174 and then 1,220-1,250.

10-month Head/Shoulders Top?

Oct 2 low = 1,019.95Nov 2 low = 1,029.38

Left Shoulder or Jan 19 high = 1,150.4530-day ma = 1,087

50-day ma = 1,088 150-day ma= 1,122200-day ma = 1,116

Key support levels 1,080-1,100, 1,040-1,060, 1,007-1,011, 944-956, 869-878

Neckline support = 1,010-1,040

Head = 1,219.80 Right Shoulders = 1,174/1,131/1,129

Breakdown confirms Head/Shoulders top and suggests decline of 200 points 820-840

Feb/May/Jun/mid-Jul lows = 1,045/1,041/1,042/1,057

Key resistance levels 1,131-1,150, 1,174, 1,220-1,230, 1,250, 1,348-1,362

150-day ma

12

SPX Index – Trading Outlook (1-4 weeks)

Apr 2010 downtrend breakout during mid-Jul 2010 signals the start of a sustainable recovery. In fact, this reversal occurred near the 38.2% retracement from Apr-Jul correction. The next challenge is for SPX to clear above formidable supply near 1,131-1,150 or the Jan/Jun/Aug highs as well as the pivotal 61.8% retracement from Apr-Jul decline. This crucial supply also represents neckline supply to a potential 4-month head/shoulders bottom pattern. Breakout here confirms head/shoulders breakout and renders next target to 1,173.56 or May 13th high and then to 1,219.80 or Apr 26th high. The 4-month technical base of nearly 120.32 points suggests projection to as high as 1,251.55. On the downside, repeated failures to breakout above 1,131-1,150 coupled with violation of trading support near 1,088-1,107may trigger another consolidation phase to establish a firmer right shoulder near 1,041-1,057 and another attempt to breakout into the fall timeframe.

4-month Head and Shoulders Bottom?

5/25 low = 1,040.78

5/13 high =1,173.57

8/9 high = 1,129.24

5/3 high = 1,205.13

4/26 high= 1,219.80

5/6 low = 1,065.79

6/8 low = 1,042.17

5/27 high= 1,103.52

7/20 low = 1,056.88

50% = 1,115.35

76.4% = 1,170.50

7/1 low = 1,010.91

61.8% = 1,140.00 6/21 high =1,131.23

5/6-5/13 rally = 10.11% 5/13-5/25 decline = -11.31% 6/6-6/21 rally = 8.54% 6/21-7/1 decline = -10.63% 7/1-8/4 rally = 11.66%

7/30 low = 1,088. 01

38.2% = 1,090.71

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SPX Index – Intra-day Trading Outlook (next few days)

Although the Jul 1st rally has been strong (11.71%) and fast (1- month) a rising wedge pattern warns of a potential near-term top. The top of this wedge pattern is at 1,145-1,150 and the bottom of pattern is just north of 1,110. Aug 2nd upside gap at 1,106-1,108 as well as the Aug 6th low a t 1,107 and 23.6% retracement (1,101) from Jul rally and Jul uptrend provide trading support. Violation here confirms a rising wedge pattern and signals the start of a correction possibly to key secondary support at 1,084-1,089 corresponding to 38.2% retracement from Jul rally, 10-week/50-day ma, and the Jul 30th bottom. If the selling continues SPX may fall to crucial intermediate-term support at 1,056-1,070 coinciding with the 50.2%-61.8% retracement and Jul 20th low. Violation here opens the door for a deeper correction back to major support near Feb/May/early-June/mid-Jul 2010 lows and Jul 1st low at 1,011-1,040. Initial supply is at 1,129-1,131 and then 1,145-1,150.

Rising Wedge Pattern?

7/5 low = 1,022.58

7/13 high =1,099.46

7/27 high = 1,120.95

7/1 low = 1,010.91

8/09 low = 1,111.58

7/20 low = 1,056.88

50% = 1,070.08

23.6% = 1,101.31

38.2% = 1,084.04

8/09 high =1,129.24

7/30 low = 1,088. 01

61.8% = 1,056.11

76.4% = 1,038.84

8/02 upside gap = 1,106.44-1,107.53

1,140-1,150

10-week/50-day ma = 1,089/1,088

8/06 low = 1,107.17

14

US Dollar Index – Monthly Secular Long-term Trend

Long-term Head and Shoulders Top remains intact. USD is locked in a trading range between mid-70s and high-80s

Breakdownbelow 71-74

Left Shoulders

Head = 120-121

Right Shoulders

Breakout above 89.5-92.5

10-month ma = 81 30-month ma = 80

15

US Dollar Index – Retracement Study - Intermediate

Failure of US Dollar Index to surpass key supply at 89-90 or the 2003 downtrend (89), the 38.2% retracement from 2001-2008 decline (90.24), Nov 2008 high (89.25) and Mar 2009 high (89.71) have led to a sharp correction. This correction is now approaching pivotal support at 79.78-80.48 or 10-mo/30-mo ma, 61.8% retracement from Nov 2009 to Jun 2010 rally, and the major lows from early 1990s to mid-1990s and 2004-2005. A successful test will help to establish a 2-year head/shoulders bottom signaling a rally back to initial supply at 82.5-83.5 or the 10-wk/30-wk ma and 23.6%-38.2% retracement from Jun 2010 decline. Secondary supply is at 84.5-85.5 and then to 88.80-89.71 or Mar 2009 and Jun 2010 highs. May 2004/Nov 2005 highs at 92.50/92.53 remains major investment supply. On the downside, violation of crucial support at 79.78 reaffirms a 2-year double top pattern opening the door for a decline to 76.74-77.65 or the Jan 2010 bottom, 76.4% retracement and 2008 uptrend. Investment support is available near 2008/2009 lows at 74.21-74.31 and then 71.05-71.21.

38.2% = 90.24

23.6% = 82.91

Dec 04 low = 80.48

Breakdown

Breakouts

50% = 96.17

61.8% = 102.10

50% = 81.96

61.8% = 83.79

76.4% = 86.05

Mar 2009 high = 89.71 June 2010 high = 88.80

61.8% = 79.78

76.4% = 77.65

Mar 2009 high = 74.21

Double Top or a Head and Shoulders Bottom?

16

EURO/USD – Intermediate-term Outlook

The strong selling from late last year may have temporarily subsided as EURUSD has found key support near its 2004/2005 bottoms at 1.1643-1.1764. The ability to find support and rally from its June low of 1.1888 as well as breaking out above 1.27 or the Nov 2009 downtrend as well as the 23.6% retracement from Nov 2009-Jun 2010 decline are encouraging. This rally has now surpassed hovering near formidable supply starting at 1.31 or the 38.2% retracement and as high as 1.34-1.35or the 10-month ma and 50% retracement from Nov 2009 decline. Major intermediate-term supply remains at 1.37-1.39 or 1995/2004 highs, 61.8% retracement and left/right shoulders of a potential head/shoulders top pattern. On the downside, initial support to 1.29 and then secondary support is at 1.25-1.27. Further key support is available near May 2010 and late-Jun lows at 1.2147-1.2154. June 2010 bottom at 1.1888 remains a crucial reaction low. A breakdown here opens the door to retest 61.8% retracement from 2000-2008 rally (1.12), longer term. 2000/2001 uptrend and 76.4% retracement at 1.00-1.01 is investment-term support.

61.8% = 1.12

76.4% = 1.01

Complex Head and Shoulders Top?

50% = 1.21

31.8% = 1.31

50% = 81.96

38.2% = 1.31

50% = 1.35

61.8% = 1.39

Breakout

17

Commodities – CRB Index Retracement Study

Testing key supply zone at 281-286/294

Feb low = 229.93Jul low = 227.58

2nd Support = 230-236

50% = 247

61.8% = 236

76.4% = 222

1st Support = 247

10-week ma = 265 30-week ma = 267

18

COMEX Gold – Intermediate-term Outlook

The 2-year head/shoulders bottom breakout last year still suggests upside to 1,325-1,350 over the intermediate-term horizon. However, if Gold enters into a parabolic move similar in scope to the Aug 1976 to Jan 1980 speculative rally (101 to 873 or 764% gains or x 8.64 move) this precious metal can extend upwards to as high as 1,950-2,205, at least from a longer-term secular basis (projection based on Feb 2001 low of 255.10). On a near-term basis, however, the breakout above 1,150 has met our shorter-term projection at 1,255-1,265 prompting the most recent correction. Recent decline appears to have held onto key support near 1,145-1,165 or 30-wk ma, Apr 2010 breakout and 2009 uptrend. 1,025-1,050 or the late-Oct 09/Feb 2010 bottoms offers secondary support. Key intermediate-term support moves up to 970-1,008 or the extension of 2009 breakout and early-2009 high. To resume uptrend, Gold needs to clear above 1,210-1,220 and then 1,267.

2-year Head and Shoulders Bottom and 6-month basing pattern breakouts suggest higher prices

Breakout above 1,140-1,150 1,210-1,220, 1,255-1,267/1,350

Key support = 1,155-1,165/1,125/1,075-1,085/1,030-1,045

Head = 681 (Oct 2008)

Right Shoulders = 865/905

Left Shoulders = 838-860 10-week ma = 1,212 30-week ma = 1,164

19

Crude Oil – Light Sweet

Crude Oil suffered a sharp -22.95% decline during Apr-May 2010 falling below the bottom of its 2009 uptrend channel at 75-76. This breakdown was followed by the rolling of the 10-wk ma (77) and 30-wk ma (78) during June 14th. A death cross sell signal coupled with two negative outside weeks (during the May 3rd and June 28th) pressured Crude Oil to pivotal intermediate-term support at 66.5-68.5 or the 38.2% retracement from 2009-2010 rally and the Dec 2009 and the Feb/May 2010 bottoms. Failure to find support here would have triggered a deeper correction to 58-60 or the 50% retracement and the Jul 2009 low and possibly to the61.8% retracement level and May 2009 breakout at 53-55 under extreme selling. Fortunately, Crude Oil has managed to hold onto support at 66.5-68.5 prompting a strong recovery. The ability to breakout above prior breakdown and 10-mo/30-mo ma near the mid-70s to 80 is encouraging. However, strong intermediate-term supply remains near 82-84 or the late-2009/early 2010 highs and then May 2010 high at 87.10. Breakout here negates head and shoulders top pattern.

Head and Shoulders Top formation or sideways trading range trend?

10-week ma = 77 30-week ma = 78

Key supply at 84-87

Key neckline support at 66.5-68.5

20

Fixed Income – US 10-Year Treasury Yields – Secular

28-year Secular downtrend in US Treasury Yields remains intact. TNX has slipped below the mid-point of its band or below its long-term equilibrium level suggesting lower rates.

Inflationary

Equilibrium

Overbought

Oversold

Top of Band = 4.49%

Middle of Band = 3.13%

Bottom of Band = 1.76%

Shorter-term range = 2.45%-3.1% Intermediate-term range = 2.04%-3.5% Longer-term range = 1.75%-4.0%

Deflationary

10-month ma = 3.37% 30-month ma = 3.39%

21

Fixed Income – US 10-Year Treasury - Intermediate

Failure to breakout above 4.0% on Apr 2010 suggests a potential double top and opens the door for a strong pullback. This downturn accelerated as TNX confirmed its double top pattern as it also broke the 50% retracement from 2008-2010 rally at 3.03%-3.1%. TNX has now quickly decline to its 61.8% retracement at 2.79%and failure to find support here will likely trigger another downturn to next key support at 2.46%-2.50% or the 76.4% retracement as well as Mar 2009 bottom. Based on the double top breakdown, we can expect TNX to fall as low as 2.04%-2.2% or to the Dec 2008 bottom and measured projection based on double top breakdown. To stabilize the downturn TNX needs to surge above 3.0%-3.1%. Intermediate term supply remains at 3.4%-3.6% or the 30-wk, 10-mo and 30-mo ma.

Major support at 2.79%

61.8% = 2.79%

50% = 3.03%

10-week ma = 3.00% 30-week ma = 3.41%

Breakout above 3.1% 3.2%, 3.4-3.6%, 4.0%, and 4.3%

76.4% = 2.50%

Breakdown below 2.79% 2.45%, 2.20-2.25%, and 2.04%

22

S&P 500 Sectors – Current Market Capitalization

Technology remains the largest and most influential sector by market cap weighing (18.6%). Consumer Staples, Energy, Financials, Healthcare, and Industrials collectively represent another 60.9% of SPX.

For the March 2009 cyclical bull rally to sustain further many of the larger market-cap weighted S&P sectors especially Technology and Financials (35% of total market cap) need to participate to the upside.

23

S&P 500 Sectors – Rotation from Oct 2002 – Oct 2007

Materials

Technology

Industrials

Consumer Discretionary

Financials

Commodities based sectors including Materials and economically sensitive sectors such as Industrials and Capital Goods led during the last cyclical bull rally (2002-2007). Technology also outperformed during the latter part of the last cyclical bull rally.

Leaders

Laggards

24

S&P 500 Sectors – Rotation from Oct 2002 – Oct 2007

Energy

Utilities

HealthcareConsumer Staples

Communications

During the prior cyclical bull rally leadership were also concentrated within natural resource intensive sectors including Energy and Infrastructure such as Utilities.

Laggards comprised of many of the defensive sectors including Consumer Staples and Healthcare.

Laggards

Leaders

25

S&P 500 Sectors – Rotation from March 6, 2009 low

Financials

Consumer Discretionary

Technology

Industrials

Materials

From the March 2009 bottom, pro-cyclical sectors and Financials have led. However, Financials sector has entered to a sideways trading range since last summer. Cyclical sectors including Consumer Discretionary and Industrials continue to outperform but is slowing in recent months. Two cyclical sectors, Materials and Technology, have also slowed since the beginning of the year.

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S&P 500 Sectors – Rotation from March 6, 2009 low

UtilitiesHealthcare

Consumer Staples

Energy

Communications

When defensive sectors such as Utilities, Healthcare, and Consumer Staples begin to outperform peers this suggests the start of a correction or maturing of cyclical bull rally.

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S&P 500 Sectors – Rotation from April 26, 2010 high

Since April 2010 peak, many of the pro-cyclical sectors have traded in line or under performed SPX Index. This suggests a deeper and more extensive correction but not necessarily the start of a major bear. If this continues this would support a trading range scenario.

Financials

Materials

Industrials

Technology

Consumer Discretionary

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S&P 500 Sectors – Rotation from April 26, 2010 highDefensive sectors have begun to outperform peers. This warns of risk aversion. If this trend persists and cyclical sectors begin to dramatically underperform defensive sectors then this would lead to risk reduction.

Energy

Healthcare

Utilities

Communications

Consumer Staples

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S&P 500 Sectors – Rotation from July 1, 2010 lowBasic Materials have outperformed based primarily on the backdrop of recent recovery in Emerging Markets and commodity prices. Utilities sector is also strong as an alternative income play to declining US interest rates.

Energy

Materials

Utilities

Industrials

Consumer Staples

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S&P 500 Sectors – Rotation from July 1, 2010 lowIt is interesting to note the mixed technical picture or dispersion taking place within the defensive sectors. For instance, Utilities and Telecom are outperforming the market and the traditional defensive sectors such as Consumer Staples and Healthcare are underperforming.

Energy

Healthcare

Utilities

Communications

Consumer Staples

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SPX versus MSCI Emerging Market Index

Above 77-78 Emerging Markets Outperforms SPX

Below 51-52 Emerging Markets Underperforms SPX

Monthly Relative Strength study shows MSCI Emerging Markets Index is now breaking out above key supply. Despite recent market uncertainties, it appears global investors continue to favor emerging equities over developed US equities.

80

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SPX versus Emerging/Developing CountriesMonthly Relative Strength study of SPX Index against various key Emerging/Developing Equity Markets suggest China is not in a bubble/speculative phase as some believe. Rather, China has lagged its Emerging Market counterparts including Russia, Brazil and India.Russia = 2,542

Brazil = Brazil = 939

India = 643

EM = 356

China = 214EAFE = 117Japan = 69

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US Mega Cap Stock Outperformance – Nifty-Fifty II

MS Multinational Index (NFT) or US Mega Cap stocks shows a large multi-year symmetrical triangle pattern alerting us the potential for a potential change in long-term leadership. Is a new Nifty-Fifty II market emerging?

Breakout

Breakdown

111

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Mid-Cap Stock Outperformance

S&P Mid-cap 400 Index (MID) or Mid Cap stocks has consistently outperformed S&P 500 Index or Large Cap stocks since 1999 as evident by relative performance over the past 10-15 years. It appears that his long-term trend can continue for many more years to come.

MID outperforms SPX

MID underperforms SPX

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SPX Dividend Yields

SPX Yields has begun to rise once again. Will income securities outperform in the years ahead?

SPX Yields rising

SPX Yields declining

Since 1970s 43% of SPX total returns came from Dividend Yields.

1.83%

Yields will likely play an influential role in a secular trading range market.

SPX Yields rising again?

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Contact InformationPeter LeeUBS Financial Services Inc.peter.lee@ubs.com212-713-8888 Ext 01

UBS Financial ServicesWealth Management ResearchNY, NY 10019www.ubs.com