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					                                                                                  Peter Lee, Chief Technical Analyst,
                                                                             Jonathan Beck, Investment Strategist,

Wealth Management Research                                                                                        21 September 2010

Technical Strategist

The Mid-term Election Year Strategy
 This report is an updated look at some interesting statistics on the         Fig. 1: Key Near-term Technical Levels
   mid-term election year cycle.
                                                                               Index           Support            Resistance
 In our previous report, on the subject we noted that the second
                                                                               SPX             1100-1110          1140-1150
   year of any 4-year Presidential election cycle (called “mid-term
   election year”) had produced a tradable market bottom each time             DJIA            10460-10480        10750
   since 1914.                                                                 COMP.Q          2300 area          2390-2440
 We also noted that this cyclical occurrence, when coupled with               Dollar Index    79-80              83.50
   oversold market conditions, can point to future market advances in          TNX             2.45%-2.50%        2.90%-3.0%
   both secular bull and bear markets.
                                                                               CRB Index       260 area           280 area
                                                                               Source: UBS Technical Research
Since the publication of that particular piece, one mid-term cycle has
come and gone (2006), and yet another is now upon us (2010). Thus,
we thought it would be interesting to revisit this study to

    1.) see how our forecast fared in 2006, and
    2.) note some implications for this cycle going forward.

Basic analysis of the mid-term election year cycle however is nothing
more than cocktail party trivia if we cannot formulate an actionable
trading strategy from it. So once again, we turn to the historical data
to see if past market behavior can give us any clues that can aid us in
our current trading decisions. We have dissected the daily closing
prices of the S&P 500 back to 1934 to see how it performed once the
mid-term election year bottom was established. However, not only
have we calculated the price advance from that mid-term year low to
the following pre-election year high (as done in the Stock Trader’s
Almanac), we also calculated the mid-term election year low on a daily
closing basis to the 31 December close of the following pre-election
year. Why did we choose this methodology? Although the prior
statistic may be much more impressive on a percentage basis, it simply
is not practical from an execution perspective. Buying at the exact
intra-day low of the day and selling at the exact intra-day high is a feat
close to impossible for most of us. On the other hand, buying near the
mid-term election year lows and holding until 31 December of the
following year is certainly a feasible investment strategy and may be
appropriate for some investors who are weary of implementing a long-
term buy and hold strategy yet do not want to become short-term day

This report has been prepared by UBS Financial Services Inc. ("UBS FS").
UBS Wealth Management Research                                                                                   21 September 2010

Technical Strategist

In our findings, since 1934 there were no negative returns based               Fig. 2: SPX Index (SPX)
on buying the daily price low during the Presidential mid-term
                                                                               Years       Mid-term        Pre-election       %
election year and holding it until 31 December of the following
                                                                                           Year Low        Year Close         Advance
year.                                                                                      (Daily Close)   (31 Dec.)

However, there were two occurrences where the S&P 500 made a                   1934-1935        8.36            13.44         60.69%
lower low during the following pre-election year before closing higher         1938-1939        8.50            12.49         46.96%
that December. Refer to the Figure 2 for performance results:                  1942-1943        7.47            11.67         56.22%
                                                                               1946-1947       14.12            15.30         8.39%
Figure 2 Explanation: The first column represents the years included
in this study. The first year in the series is the mid-term election year of   1950-1951       16.65            23.77         42.76%
the four-year Presidential election cycle; the second year in the series is    1954-1955       24.80            45.48         83.37%
the pre-election year. For example, Franklin D. Roosevelt was elected in       1958-1959       40.33            59.89         48.50%
1932. His first year in office, or post-election year, was 1933 making
1934 and 1935 his mid-term and pre-election years respectively. We             1962-1963       52.32            75.02         43.39%
are currently in the mid-term election year for Barack Obama. The              1966-1967       73.20            96.47         31.79%
second column represents the mid-term year low (on a daily closing             1970-1971       69.29            102.09        47.34%
basis) registered by the S&P 500 Index. The third column represents the        1974-1975       62.28            90.19         44.81%
closing price of the S&P 500 on 31 December of the following year
(pre-election year). 2011 is the next pre-election year. The final column      1978-1979       86.90            107.94        24.21%
represents the advance or decline, on a percentage basis, the S&P 500          1982-1983       102.42           164.93        61.03%
made from the low in column 2 to the close at year end in column 3.            1986-1987       203.49           247.08        21.42%
The simple logic behind this table is such: buy the S&P 500 on the low
                                                                               1990-1991       295.46           417.09        41.17%
of the mid-term year (daily closing basis) and hold it until the end of
the following, pre-election year (31 December).                                1994-1995       438.92           615.93        40.33%
                                                                               1998-1999       927.69          1,469.25       58.38%
The first takeaway from this table is that the mid-term election year          2002-2003       768.63         1,111.92        44.66%
cycle worked once again in 2006-2007, making for a 100% success
                                                                               2006-2007      1,219.29        1,468.36        20.43%
rate since 1934. The average nominal gain for all the years in the study
was 43.47%; the median return was 44.66%. The highest mid-term                                1,010.19             ?
                                                                               2010-2011                                          ?
cycle return was 83.37% (1954-1955); the lowest return was 8.39%                             (July low?)
(1946-1947). The previous 2006-2007 mid-term election gain ranked              1934-2007
as the 2nd lowest in the study at 20.43%.                                      (19 Mid-term Elections)
                                                                               43.47% (Average Nominal Return)
Do these statistics mean that it is guaranteed to work in 2010-2011?           44.66% (Median Return)
The answer is no - but, in our opinion, they make it highly probable           Source: Reuters and UBS WMR
that we can again witness positive nominal gains on the S&P 500 from
the low in 2010 to 31 December 2011. The question then becomes-
when will we experience the low for the S&P in 2010? Of course, we
will only know for sure in hindsight, but we can use the historical data
in this study to see if identifying a range is possible.

Our findings are on page 3.

                                                                                                                 Technical Strategist – 2
UBS Wealth Management Research                                                                                 21 September 2010

Technical Strategist

Figure 3 Explanation: There were 19 mid-term election year cycles
from 1934 to 2006. Of those 19 occurrences, 5 experienced mid-term             Fig. 3: Mid-term Low
election year lows in January, and 5 experienced mid-term election
                                                                               Month       Occurrences   % of Total Years
year lows in October, for a total of 26.32% occurrences each. This is
only moderately significant, in our opinion, when viewed on a single                                                   1950 (Bull)
month basis. But when combined, the percentage of time a mid-term                                                      1954 (Bull)
cycle low occurred either in January or October jumps to 52.64%, or            January           5           26.32%    1958 (Bull)
just more than half of all occurrences since 1934. This holds much
more weight, in our opinion.                                                                                           1986 (Bull)
                                                                                                                       1998 (Bull)
But let’s take this a step further. To the far right of the table, we noted                                            1946 (Bear)
the years which witnessed a cycle low in each particular month. In
                                                                                                                       1966 (Bear)
parenthesis after each year, we identified whether each mid-term
election year fell within a secular bull market trend, or a secular bear       October           5           26.32%    1974 (Bear)
market trend; based on the following classification:                                                                   1990 (Bull)
                                                                                                                       2002 (Bear)
   1929-1949: Secular Bear
                                                                                                             10.53%    1942 (Bear)
   1949-1966: Secular Bull                                                    April             2
   1966-1982: Secular Bear                                                                                            1994 (Bull)
   1982-2000: Secular Bull                                                                                  10.53%    1938 (Bear)
   2000-Present: Secular Bear                                                 March             2
                                                                                                                       1978 (Bear)

Under this classification something interesting emerges: all mid-term                                        10.53%    1962 (Bull)
                                                                               June              2
election year lows that occurred in January fell within broad secular                                                  2006 (Bear)
bull markets (100%); while 4 out of 5 mid-term year lows that                  August            1           5.27%     1982 (Bear)
occurred in October fell within broad secular bear markets (80%). This
                                                                               July              1           5.27%     1934 (Bear)
would then suggest to us the highest statistical probability based on
data from 1934 to present leans toward a mid-term election cycle low           May               1           5.27%     1970 (Bear)
in October. Based on our current technical call of the S&P 500 still           December          0           0.00%
trading in the middle of its secular bear range (and also in the middle        February          0           0.00%
of its cyclical bull rally), the posting of a new-low during July at                                         0.00%
                                                                               November          0
1,010.91 is generating a lot of interests that a mid-term election year
low has already occurred.       This action coupled with the fact that         September         0           0.00%
September is the worst month of the year from a seasonal perspective           Total            19           100%
and the month of October is infamously remembered as “crash”
month is certainly keeping investors on their toes.                            Source: Reuters and UBS WMR

One final observation is due before we wrap up. In the opening
paragraphs, we noted there were two occurrences where the pre-
election year actually experienced lower lows than the mid-term
election year. These occurred in 1934-1935 (3.61% lower than the
mid-term year low) and 1946-1947 (2.85% lower than the mid-term
election year). Notice anything interesting about these periods?
Correct- they both occurred during secular bear market cycles. Even
though we believe that the S&P 500 is in the middle of a secular bear
market, it still implies that there is a slim chance (2 occurrences in 19 is
hardly statistically significant, in our opinion) that 2011 may experience
a lower low than 2010 before turning higher into the 31 December

As another mid-term election year approaches what conclusions can
we draw for the remainder of 2010 and into pre-election year in
2011? Although the March 2009 cyclical bull rally has produced stellar
returns (82.94% from 2009 cyclical low to the recent April 2010 peak)
it is our contention that there is still some unfinished business left to
the upside. The strong historical tendencies for pre-election year rallies
(100% track record since 1934) coupled with the confirmation of a
mid-term election year bottom lend support for the resumption of the
March 2009 cyclical bull later in the year. If history repeats itself again,
another major 4-year cycle low will develop and from this bottom SPX
will generate yet another sustainable rally into pre-election year (2011).

                                                                                                               Technical Strategist – 3
UBS Wealth Management Research                                             21 September 2010

Technical Strategist

We cannot rule out the possibility that a mid-term cyclical low may
have already developed during July at 1,019.91. However, as we move
deeper into the mid-term election year, the inability of SPX to generate
a new lower low coupled with a confirmed breakout above key supply
at 1,130-1,150 confirms a mid-term election year cycle low. So the
next question then becomes how high is high for SPX next year?
Based on historical average gains of 43.47% from the current
trough during mid-term election year of 1,010.91 (July 2010
bottom) through pre-election year-end this brings SPX to an
optimistic 1,450 target by 31 December 2011. Based on the
same historical average returns but starting from a marginal
new low of 943-956 or the area corresponding to the crucial July
2009 neckline breakout we arrive at a projected SPX target of
1,353-1,372. We find it interesting that this projection comes
strikingly close to our 2011 price target of 1,348 – 1,362, based
primarily on the 76.4% retracement of the 2007 – 2009 decline as
well as the neckline breakout from the November 2008 Obama
election day high(1,007.51) during August 2009.

                                                                           Technical Strategist – 4
UBS Wealth Management Research                                                               9 November 2009

Technical Strategist


                                      Dow Jones Industrial Average         Dow Jones Industrial Average
   Mid-term Election Low                 Pre-election year High               Gains Low-High/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%
          Mar 1926                               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%
           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%
           Oct 2002                              Dec 2003                         43.5% / 25.3%
           Jan 2006                              Oct 2007                         33.18 / 24.40%
           ??? 2010                              ??? 2011                            ??? / ???
        Avg. (24) May                         Sept (15.5 mo)                      49.3% / 17.7%

 Source: Reuters and UBS WMR

This report has been prepared by UBS Financial Services Inc. ("UBS FS").
UBS Wealth Management Research                                                                                                       9 November 2009

Technical Strategist


Term / Abbreviation                Description / Definition
% +or- Moving Avg (DMA)            % +or- moving average is the percent above or below the moving average is used to help measure an overbought
                                   or oversold condition. It is calculated by taking the difference between the group price and its 30-week moving
                                   average, and then dividing by the 30-week moving average times 100. The percentage above or below the moving
                                   average is used to help measure an overbought or oversold condition and is a component of risk management.
Adjusted Relative Strength (ARS)   Number gives a 50% weighting to the 1-month relative strength, 30% to the 3-month, and 20% to the 6-month
                                   numbers to arrive at a single weighted number.
Base                               A chart pattern marking a period of accumulation following a downtrend. The larger the base, the greater the
                                   upside potential following its completion. A base can take many forms.
Breakdown                          A technical term indicating a downside resolution of a chart pattern. Its significance is determined by the same
                                   factors governing a breakout.
Breakout                           A technical term indicating an upside resolution of a chart pattern. Breakouts can take many forms, and their
                                   degree of importance is determined by the significance of the chart pattern which preceded it.
Channel                            A chart pattern comprised of two parallel trend lines, which form a trading band. Channels take the form of
                                   uptrend, downtrend and horizontal.

Downtrend Line                     A trend line connecting successively lower peaks for a stock (or market). Its technical significance is determined by
                                   the same factors governing an uptrend line

FSR                                Forecast Stock Return is defined as expected percentage price appreciation plus gross dividend yield over the next
                                   12 months.
Gap                                An open space in a chart created when a stock (or market) opens either higher than its highest level attained
                                   during the prior session (referred to as an upside chart gap) or lower than its lowest level reached during the prior
                                   day (called a downside chart gap).
Internal Trend Line                A single trend line connecting at least several high and low points for a stock (or market) over time.

Moving Average                     A technical analysis tool designed to smooth out a stock’s (or market’s) shorter-term fluctuations to provide a
                                   better picture of an underlying trend. Many moving averages exist, but the 30-week moving average (also known
                                   as the 30-week line or 150 day line) is one of the most popular and respected in technical circles. It is calculated
                                   by totaling the latest 30 weekly (usually Friday closing) price levels and dividing by 30 to arrive at the average. Each
                                   week, the most recent week’s figure is added to the total, and the price level from 30 weeks ago is subtracted –
                                   hence the term “moving.” Please note that a breakout above or breakdown below this line does not, in and of
                                   itself, constitute a buy or sell signal.
MRA                                Market Return Assumption is defined as the one-year local market interest rate plus 5% (a proxy for the equity risk
                                   premium and not a forecast).
Positive/Negative “Outside” Day    When one day’s range (high and low) exceeds the prior day’s range, and the stock (or market) in question closes
                                   near its daily peak, this is referred to as a positive “outside” day. A negative “outside” day would be recorded if
                                   the stock (or index) finished near its daily low after having a wider range than the prior session. The same rule can
                                   be applied on a weekly and monthly basis as well.
Relative Strength                  Relative strength is a performance comparison between a sector, group, or stock and the S&P 500 Index over a
                                   specified time frame. Our time frame is a often a one, three, and six month basis but does vary according to
                                   investment orientation.
RRD                                Rating/Return Divergence is automatically appended to the rating when stock price movement has caused the
                                   prevailing rating to differ from that which would be assigned according to the rating system and will be removed
                                   when there is no longer a divergence, either through market movement or analyst intervention.
Support                            An area where increased buying interest is likely to develop during a decline. These points, which can take several
                                   forms (minor, major, etc.) often provide downside protection for an issue in a primary uptrend, but only temporary
                                   relief to an issue in a primary uptrend, during which time many support levels are often broken.
Top                                A chart pattern marking a period of distribution following an uptrend. The larger the top, the greater the
                                   downside potential following its completion. It, too, can take many forms.

“Uptrend Line”                     A trend line connecting successively higher low points for a stock (or market). The longer this line is in force, and
                                   the points that occur along it, the greater its’ technical significance.

                                                                                                                                   Technical Strategist – 6
UBS Wealth Management Research                                                                                                  9 November 2009

Technical Strategist


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Analysts provide a relative rating, which is based on the stock’s total return potential against the total estimated return of the appropriate sector
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Industry Sector Relative Stock View
Outperform (OUT)                                              Expected to outperform the sector benchmark over the next 12 months.
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UBS Financial Services Inc. Technical Research Dept.: Definitions and Distribution
UBS Financial        Definition and criteria                                                                                      Corresponding
Services Rating                                                                                                                   Rating Category
                     Well-defined, reliable up-trend, an increase in the rate of change (or strong momentum) and confirming
Bullish                                                                                                                                 Buy
                     technical indicators
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

                                                                                                                              Technical Strategist – 7
UBS Wealth Management Research                                                                                            9 November 2009

Technical Strategist


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                                                                                                                        Technical Strategist – 8
UBS Wealth Management Research                                                                                          9 November 2009

Technical Strategist

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                                                                                                                      Technical Strategist – 9

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