UBS: There's 'clear evidence' that the stock market has topped out for now
Using technical analysis - the study of trading patterns to forecast changes in a security - Michael Riesner and Marc Müller wrote on Tuesday that Friday's sell-off was not a one-day event.
Markets got busy again late last week, as global bonds sold off, followed by US stocks when the market opened on Friday. The analysts pointed to the breakout in bond yields, and higher volatility in the bond market, as the trigger for the move in risk assets including stocks.
On Friday, stocks experienced their steepest sell-off since the aftermath of the UK referendum in June. Stocks rebounded on Monday, but lost much of those gains on Tuesday.
In early trading on Wednesday, they were little changed for the week, and the S&P 500 opened at 2,130.30.
According to the analysts, the S&P 500 on Friday broke its pivotal early-September trading low of 2,157, triggering a "tactical short signal", or a cue to expect further declines.
"With the Friday break down we are changing our tactical bias towards a more cautious stance since we see the risk of an 8% to 10% correction into late October/early November, where we have our next bigger tactical low projection for a classic year end bounce/rally," they wrote.
For the S&P 500, key support, or a level below which traders would likely not allow the index to fall, is at 2,134/2,100, they said. A drop below this level would suggest more weakness towards 2,000 - a level that was last tested during the post-UK-referendum sell-off in June.Another signal suggesting a September top to Reisner and Müller is the fact that the measures of volatility on the S&P 500 and Russell 2000 jumped.
"Together with the divergence on the volatility side in the VIX, and the Russell-2000 vola index, our weekly trend work turning short, plus the SPX breaking its early September trading low at 2157, we have clear evidence that our suggested September top is in place," they emphasized.
The UBS technical analysts are not alone in forecasting that the sell-offs late last week and on Tuesday are not done.
Goldman Sachs' equity strategists forecast that the index would fall and close the year at 2,100, less than 2% from its current level, before recovering in the subsequent nine months. Their reasons for this call included a rise in political uncertainty heading into the November elections, and stretched stock valuations.