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The Case for A Cyclical Top in SPX 5.25.2011.pub

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					                     Nautilus Capital Research                                                            www.nautilus-cap.com

The Case for a Cyclical Top                                                                                   May 25, 2011
Tom Leveroni, CFA      Market Strategy                                          Research Sales:     John Karle, CFA    203-353-7620
James Cutting, CMT     Technical Analysis
Shourui Tian, PhD      Quantitative Analysis                                                        James Cutting, CMT 847-615-1618


                                                    The Case for a Cyclical Top
                                                A Summary of Recent Commentaries

    In our 2011 market outlook (1/5/2011), we detailed our forecast that the SPX cyclical bull market off the March 2009 lows
    would likely continue up to the 1350 level this year before succumbing once again to the ongoing secular headwinds of a
    generational deleveraging. With the first half of that prediction recently achieved on April 26th with an SPX close of
    1355.66 , now is the time to address the likelihood of the second part — i.e. the onset of a new cyclical bear market for
    stocks. In this report, using highlights from recent commentaries, we argue that data subsequent to our beginning of the
    year forecast largely support our case and suggest that long-term risks now far outweigh rewards. Tactically, we are not
    ruling out marginally higher highs in stocks in coming weeks, but would judge our call wrong if the SPX rally were to ex-
    tend above 1410 (5% above recent high) and/or beyond this December. We expect the impending bear market will take
    the SPX down 20% or more (below 1100).


    Part I: Unfinished Secular Business:

        Page 2 — Technical Profile of Secular Bear Markets (from 5.17.11)
        Page 3 — Secular Excesses Remain
        Page 4 — Secular Headwinds Swirling Again

    Part II: Signs Warn of a Cycle Turn

         Page 5 —– Technical Profile of Cyclical Bull Markets within Secular Bears (from 5.9.11)
         Page 6 —– Deteriorating Technical Momentum (from 5.16.11)
         Page 7 — Defensive Leadership (from 5.11.2011)
         Page 8 — Excessive Optimism on Stocks
         Page 9 — Decoupling of Stocks and Bonds (from 5.18.11)
         Page 10 — Slowing Growth (from 5.2.11 and 5.10.11)
         Page 11 — Rising Inflation (from 2.16.11)
         Page 12 — Oil Shock (from 2.25.11)
         Page 13 — Dr. Copper (from 3.22.11)
         Page 14— Commodity Reversal (from 5.6.11)
         Page 15 — Emerging Market Woes (from 5.3.11 and 5.19.11)

    Part III: Handicapping the Next Cyclical Bear Market

         Page 16 — Spotting the Top (from 5.20.11)
         Page 17 — The Retest Pattern (from 3.29.11)
         Page 18 — Forecast




  ** Market data provided by Bloomberg unless otherwise noted.     SEE IMPORTANT DISCLOSURES ON THE LAST PAGE OF COMMENTARY
                       Nautilus Capital Research                 Page 1 of 19                  The Case for a Cyclical Top
Part I: Technical Profile of Secular Bear Markets
                                        — Excerpt ‘Daily Market Outlook,’ 5/17/2011
                                                                                               Inflation Adjusted Stock Returns
                                                                               Today’s note takes a long-term view of inflation adjusted stock
                                                                               returns. It has been our consistent contention that the current
                                                                               cyclical rally, begun in March 2009, is taking place in the con-
                                                                               text of an “incomplete” secular bear environment. The charts on
                                                                               this page establish the empirical evidence for our view, with the
                                                                               following key points:
                                                                                         1) The current cycle is running into all kinds of time
                                                                               and price resistance (see chart left). It is very common for cy-
                                                                               cles to retrace 62% (key Fibonacci ratio) of the prior cycle
                                                                                         2) Current 11 year secular decline is far short of the
                                                                               average 19 year duration on the previous 4 secular bear periods
                                                                               — chart below
                                                                                         3) The last cyclical decline in a secular bear period has
                                                                               been particularly nasty when adjusted for inflation, averaging
                                                                               58% over 5 years — see 4 charts at bottom.




 ** Market data provided by Bloomberg unless otherwise noted.     SEE IMPORTANT DISCLOSURES ON THE LAST PAGE OF COMMENTARY
                      Nautilus Capital Research                 Page 2 of 19                   The Case for a Cyclical Top
Part I: Secular Excesses Remain




 ** Market data provided by Bloomberg unless otherwise noted.     SEE IMPORTANT DISCLOSURES ON THE LAST PAGE OF COMMENTARY
                      Nautilus Capital Research                 Page 3 of 19                  The Case for a Cyclical Top
Part I: Secular Headwinds Swirling Again




 ** Market data provided by Bloomberg unless otherwise noted.     SEE IMPORTANT DISCLOSURES ON THE LAST PAGE OF COMMENTARY
                      Nautilus Capital Research                 Page 4 of 19                  The Case for a Cyclical Top
Part II: Technical Profile of Cyclical Bull Markets Within Secular Bears
                                          — Excerpt ‘Daily Market Outlook,’ 5/9/2011
                                                                  SPX Analog Update
The key development last week, in our view, was the 9% plunge in commodity prices (CRB Index). Our analysis in Friday’s note on large commodity
price declines coming off one year highs suggested that that was the type of action often seen around cyclical peaks in the economy and the stock market.
                                                                      Duration     On page 2, we add another variant of that analysis by looking at other
SPX Cyclical Bulls in Bull Duration                 % Decline of
                                     Bull % Return                 Months of Next times when both the SPX and CRB had made one year highs in the past
   Secular Bears         Months                      Next Bear
                                                                        Bear       month, but the CRB had underperformed by > 7% (as is the case cur-
      1907-1909            24             90%           -27%             22        rently). We find only 6 occurrences since 1957 (the start of our daily
      1911-1912            12             29%           -44%             22        CRB daily) and there is strong bearish forward bias for both commodi-
      1914-1916            23            107%           -40%             13        ties and stocks. More importantly, 4 of the 6 signals were dead on cy-
      1917-1919            22             81%           -47%             22        clical peaks in SPX in 1976, 1980, 1990, and 2000. With this thought
     1932 - 1934           19            169%           -23%              6
                                                                                   in mind, we review our cycle analogs on this page of SPX cyclical bull
      1935-1937            24            132%           -54%             13
      1938-1938             7             62%           -46%             41        markets within secular bear periods. As one can in the charts below and
      1966-1968            25             48%           -36%             18        summarized in the table left, the current bull market (102% return over
      1970-1973            32             74%           -48%             21        26 months) has matched the average magnitude and duration of these
      1974-1976            24             73%           -19%             17        other historical recovery cycles. We continue to believe the market is at
      1978-1980            33             62%           -27%             21        high risk of cyclical peak and that further upside in SPX will limited to
      2002-2007            63             96%           -57%             17        1410. As for potential downside risk, using those same analogous peri-
     AVERAGE               26             85%           -39%             19        ods as a roadmap, the average bear market following these 12 cyclical
    2009-Present           26            102%                                      bulls was a 39% decline over 19 months.




   ** Market data provided by Bloomberg unless otherwise noted.     SEE IMPORTANT DISCLOSURES ON THE LAST PAGE OF COMMENTARY
                        Nautilus Capital Research                 Page 5 of 19                       The Case for a Cyclical Top
Part II: Deteriorating Technical Momentum
                                        — Excerpt ‘Daily Market Outlook,’ 5/16/2011
                                                                                                  Momentum Divergences At Cyclical Tops
                                                                                          The SPX fell –0.81% Friday and is off –1.89% so far in
                                                                                          the month of May, the beginning of its historically rocky
                                                                                          seasonal stretch. Our macro stance remains that the SPX
                                                                                          will make its cyclical top this year, and probably sooner
                                                                                          rather than later. One of our arguments for that view is that
                                                                                          technical momentum, as measured by the number of stocks
                                                                                          on the NYSE making new 52 week highs, has deteriorated
                                                                                          sharply and pales in comparison to the momentum of a year
                                                                                          ago as shown in the chart left. The charts below overlay
                                                                                          the last 11 cyclical tops in SPX (ones leading to a > 20%
                                                                                          decline) with NYSE new 52 week highs (source:global
                                                                                          financial database). As one can see, the current 13 month
                                                                                          momentum divergence is consistent with the 10 month
                                                                                          average lead time experienced at other cyclical tops.




 ** Market data provided by Bloomberg unless otherwise noted.     SEE IMPORTANT DISCLOSURES ON THE LAST PAGE OF COMMENTARY
                      Nautilus Capital Research                 Page 6 of 19                   The Case for a Cyclical Top
Part II: Defensive Leadership
                                          — Excerpt ‘Daily Market Outlook,’ 5/11/2011
                      Defensive Leadership
We have been noting the rise of defensive leadership for several
months now but yesterday’s action really stood as a clear exam-
ple. Only 4 out of the 10 SP sectors made new highs yesterday
and all four were defensive — Healthcare, Utilities, Staples, and
Telecoms. Even if one removes those sector distinctions, and
just looks at Beta or volatility of each of the 500 SPX stocks,
one clearly sees that investors have clamored for more conserva-
tive issues of late. The chart right shows the SP500 High Beta
Index (SP5HBI) overlaid with the SP500 Low Volatility Index
(SP5LV1). In the past 3 months, Low vol stocks are up 6.56%
while High beta is down –0.56%. We view the current relative
deterioration of riskier stocks as consistent with our macro view
that the cyclical topping process has begun for SPX — see chart
bottom right.

   20 Lowest and Highest Beta Stocks in SP500
                                                   3 Month Total
  Ticker           GICS Sector           BETA
                                                     Return %
  FDO        Consumer Discretionary       0.54        20.94%
  WMT          Consumer Staples           0.58         1.06%
  GIS          Consumer Staples           0.58         9.45%
    K          Consumer Staples           0.60         8.16%
  CLX          Consumer Staples           0.60        -1.66%
  HSY          Consumer Staples           0.61        14.03%
   CL          Consumer Staples           0.61         9.07%
  ABT             Health Care             0.61        17.08%
  HRL          Consumer Staples           0.61        14.43%
   SO               Utilities             0.62         6.22%
  CPB          Consumer Staples           0.62        -1.09%
   KR          Consumer Staples           0.63         8.90%
  AZO        Consumer Discretionary       0.64         9.79%
   LO          Consumer Staples           0.64        42.01%
  KMB          Consumer Staples           0.64         3.88%
  JNJ             Health Care             0.64         9.32%
  MKC          Consumer Staples           0.64        10.36%
   DF          Consumer Staples           0.65        22.77%
  MCD        Consumer Discretionary       0.65         5.55%
  BAX             Health Care             0.65        14.93%
   MU        Information Technology       1.64         -6.10%
   FITB            Financials             1.65        -15.68%
  MWW        Information Technology       1.66         -1.83%
  ZION             Financials             1.68         -3.09%
   GCI       Consumer Discretionary       1.68        -13.09%
  JOYG             Industrials            1.69         -0.98%
   AKS              Materials             1.70         -3.73%
    MI             Financials             1.70         8.41%
   TIE              Materials             1.71         1.64%
   HST             Financials             1.73        -11.48%
   PFG             Financials             1.74         -1.38%
   PLD             Financials             1.74         6.94%
   ATI              Materials             1.75         7.26%
   MEE               Energy               1.78         -0.52%
   JNS             Financials             1.78        -15.53%
   CBG             Financials             1.80        13.37%
   LNC             Financials             1.82         -4.53%
   HIG             Financials             1.83         -6.91%
   CLF              Materials             1.89         2.48%
  GNW              Financials             2.01        -17.22%
   ** Market data provided by Bloomberg unless otherwise noted.      SEE IMPORTANT DISCLOSURES ON THE LAST PAGE OF COMMENTARY
                        Nautilus Capital Research                  Page 7 of 19                  The Case for a Cyclical Top
Part II: Excessive Optimism On Stocks




 ** Market data provided by Bloomberg unless otherwise noted.     SEE IMPORTANT DISCLOSURES ON THE LAST PAGE OF COMMENTARY
                      Nautilus Capital Research                 Page 8 of 19                  The Case for a Cyclical Top
Part II: Decoupling of Stocks and Bonds
                                        — Excerpt ‘Daily Market Outlook,’ 5/18/2011
                                                                                         Stocks and Yields Decoupling; Small-caps Breaking Down
                                                                               Today’s note makes two observations that support our case that the end of the
                                                                               current stock cycle could be upon us. The first is that the stocks and bond yields
                                                                               appear to be decoupling — i.e. deviating from the positive correlation (stocks
                                                                               and yields moving in same direction) that has been the norm since 1998. We
                                                                               are struck by the current decline in yields (10yr yield down 50 bps in past
                                                                               month) in the face of generally rising stock prices as shown in the chart left.
                                                                               One could easily rationalize this divergence citing the Fed’s artificial manipula-
                                                                               tion of yields thru quantitative easing. We believe, however, there is a lot more
                                                                               to the current drop in yields than mere Fed buying and that it more likely marks
                                                                               an important shift in economic expectations that has occurred prior to both of
                                                                               the last two cyclical SPX peaks in 2007 and in 2000 as shown in the charts
                                                                               below. Our second observation is that the relative weakness we have been
                                                                               awaiting in small-caps PRIOR to an SPX peak could finally be occurring now.
                                                                               The chart at the bottom of the page shows that small-cap relative performance
                                                                               tends to suffer after the Russell 2000 falls to a new 2 month low, as occurred
                                                                               yesterday. Further, we would note that the small-cap relative performance
                                                                               peaked 3 weeks prior to the current SPX high on April 29th, fulfilling (for the
                                                                               moment) one of our key requisite technical conditions for a cyclical peak in
                                                                               SPX.




 ** Market data provided by Bloomberg unless otherwise noted.     SEE IMPORTANT DISCLOSURES ON THE LAST PAGE OF COMMENTARY
                      Nautilus Capital Research                 Page 9 of 19                         The Case for a Cyclical Top
Part II: Slowing Growth
                                        — Excerpt ‘Daily Market Outlook,’ 5/2/2011, 5/10/2011




 ** Market data provided by Bloomberg unless otherwise noted.      SEE IMPORTANT DISCLOSURES ON THE LAST PAGE OF COMMENTARY
                      Nautilus Capital Research                 Page 10 of 19                  The Case for a Cyclical Top
Part II: Rising Inflation
                                        — Excerpt ‘Daily Market Outlook,’ 2/16/2011
       US Producer Price Index                                                     A Long-term Look at Inflation
     All Commodities YoY NSA                         SP futures have clawed back up 4 points this morning to around 2 year highs, drawing ever
          Cross Above 10%                            closer to our long standing 1350 cycle target. Reiterating our stance from the past few
Fwd SPX Monthly Returns 1792—Present                 weeks, we are growing increasingly concerned that little long-term upside remains for
                                                     stocks from this juncture with substantial downside risk as the current advance is occurring
               SPX Fwd      SPX Fwd    SPX Fwd       against a backdrop of a statistically overstretched trend, deteriorating technical momentum,
    Date
               3 Months     6 Months   12 Months     excessive optimism, rising long-term interest rates, underwhelming credit growth, and un-
 3/31/1793      -0.14%       6.36%       4.69%       derperforming Emerging Markets. Another palpable global concern is rising inflation, as
 11/30/1794      7.07%      11.93%       3.39%       attested by the increasing incidence of food riots. Though the headline US PPI year over
 12/31/1800      0.22%       1.10%       2.58%       year % change, released this morning, showed a modest downtick to 3.6%, the monthly
 10/31/1804     -2.20%      -3.30%      -6.59%       +0.5% gain in core PPI was the largest increase in 28 months. In the chart below, we pro-
 2/28/1809       2.15%       1.08%      -1.07%       vide a very long-term perspective on the relationship between stocks and inflation and the
 10/31/1812      2.27%       2.27%       1.14%       conclusion is straight forward — elevated levels of inflation are bad for stocks. The data is
 2/28/1822      -5.66%      -6.60%      -9.43%       the US PPI All Commodities Year over Year % Change (PCACYOY Index in Bloomberg)
 3/31/1835       6.36%       1.12%      -2.80%
                                                     as goes back to 1792 (source: Global Financial Database). As one can see in the chart be-
 8/31/1836      -6.02%      -20.00%     -10.81%
                                                     low, the current 5.7% yearly gain in this inflation gauge remains in a zone that has histori-
                                                     cally been bearish for stocks. The real danger zone to watch in coming months, however,
 2/28/1839       0.50%      -8.47%      -14.95%
                                                     would be a yearly inflation rate of greater than 10% as shown in the table left.
 8/31/1845       9.60%       6.24%      -2.90%
 4/30/1847       8.99%      -3.37%      -7.87%
 7/31/1852       4.95%       2.97%      -2.97%
 9/30/1853      -1.05%       1.05%      -18.95%
 1/31/1854      -1.07%      -15.96%     -21.28%
 4/30/1857      -10.30%     -38.23%     -14.71%
 3/31/1862      12.91%      35.49%      63.09%
 5/31/1862       8.95%      29.85%      60.01%
 10/31/1879      5.54%      -3.27%      13.85%
 9/30/1881      -3.84%      -6.06%      -1.21%
 5/31/1882       9.85%       2.85%       2.63%
 4/30/1898       8.21%       9.24%      27.52%
 8/31/1899      -5.49%      -1.73%      -8.95%
 9/30/1902      -1.28%      -9.57%      -26.95%
 6/30/1907      -18.43%     -15.85%     -2.70%
 9/30/1909      -1.47%      -4.99%      -8.90%
 2/28/1910      -8.63%      -10.54%     -6.43%
 3/31/1912       0.00%       2.61%      -8.34%
 11/30/1915     -3.27%      -1.27%       3.38%
  9/4/1918      -1.63%       7.58%      21.55%
  8/6/1919       0.92%      -0.26%      -13.03%
 12/3/1919      -5.64%      -12.35%     -19.06%
  1/3/1923      -7.86%      -11.97%     -6.86%
 10/2/1933       8.79%      -2.80%      -3.44%
  3/1/1937       3.29%      -24.75%     -41.00%
  6/2/1941      -8.48%      -15.21%     -17.62%
  7/1/1946      -11.88%     -7.33%      -8.02%
  5/1/1948      -7.52%      -9.25%      -15.49%
 10/2/1950      11.74%      10.30%      17.27%
  3/1/1973       1.17%       1.23%      -15.57%
  1/2/1979       2.91%      13.54%      18.05%
 10/3/2005       2.50%       1.65%      12.10%
  1/2/2008       5.24%      -3.59%      -44.76%
  3/3/2008      -8.53%      -30.08%     -37.01%
    AVG          0.09%      -2.69%      -3.37%
AllMonthsAVG     1.04%       2.10%       4.36%
   T-Stat        -0.90       -2.39       -2.46
    # Up           22         19          14
  # Down           21         25          30

 ** Market data provided by Bloomberg unless otherwise noted.      SEE IMPORTANT DISCLOSURES ON THE LAST PAGE OF COMMENTARY
                        Nautilus Capital Research               Page 11 of 19                   The Case for a Cyclical Top
Part II: Oil Shock
                                             — Excerpt ‘Daily Market Outlook,’ 2/25/2011
                                        Oil Spike Raise Risks of Higher CPI, Bear Market in Stocks, and Recession
The SPX fell –0.10% yesterday for a third straight decline off the Feb 18th high though the rebound late in the day has continued this morning with the
moderation of oil prices. Though the $7 reversal off oil’s intraday high might have generated a sigh of relief for stock bulls, our note this morning suggests
the longer-term damage to the economy, and hence the stock market, might already be done. In the analysis below, we define an oil “spike” as a 50% rise
in Brent crude oil over a 6 month period, as has occurred this week with the spectacular advance from 73 to 110 since August on the heels of Mideast tur-
moil. The table below summarizes forward results for the SPX, Brent Crude, US CPI, and US GDP. The chart below shows all these defined oil spikes
over the past three decades relative to the onset of increases in CPI and economic recessions. One noteworthy observation is that oil spikes have tended to
come in twos, with the first one generally signaling the start of a cyclical topping process for the SPX and the second one providing the nail in the coffin a
few months after the SPX peak. Similar to our comments in recent days on negative breadth surges near highs and increases in volatility (VIX), we believe
the current oil spike is another piece of evidence supporting our belief that a cyclical “topping process” has likely begun in the SPX. With the SPX essen-
tially achieving our longstanding 1350 cyclical bull market target last week — and against a backdrop of a statistically overstretched trend, slowing techni-
cal momentum, excessive optimism, rising long-term interest rates, rising inflation, lagging emerging markets, stagnant credit growth and real estate market
— we are willing to now bet that very little upside remains for the SPX from this point. We will have much more to say in coming weeks about what to
expect during that process but, in preview, it would not preclude a little more marginal upside and could generally drag on for many months before the next
Bear market decline would reach full force.




                Forward Returns After Brent Crude Rises 50% in 6 Months (1988-Present)
                     SPX Forward % Return After               Brent Crude Forward % Return After                   CPI % Change               GDP Yearly % Rate
                                                                                                                                                        12 Months
 Event Date    1 Month   3 Months   6 Months 12 Months   1 Month     3 Months   6 Months    12 Months   3 Months     6 Months   12 Months   At Signal
                                                                                                                                                           later
 3/31/1989      5.01%    10.76%     18.22%     15.57%    -4.90%       -10.78%     -8.63%      -6.44%     1.23%         1.88%       4.75%       4.1          2.7
 8/22/1990     -1.60%      0.15%    15.30%     23.39%    9.80%         0.70%     -42.23%     -34.45%     2.22%         3.22%       4.37%       2.5         -0.7
  6/4/1999      4.78%     -0.28%      6.12%    11.26%    13.35%        33.25%     51.73%      82.09%     0.42%         1.45%       3.13%       4.9          4.2
 10/10/2000     3.23%     -6.39%    -15.94%   -20.87%    -0.53%       -20.94%    -20.63%     -31.30%     0.58%         1.44%       2.59%       4.1          0.6
 5/20/2002     -5.01%    -15.78%    -16.67%   -15.77%    -6.94%        0.00%     -11.49%      -2.77%     0.39%         1.06%       2.18%       1.6          1.5
 10/4/2004     -0.41%      6.90%      4.07%    8.06%     1.88%        -15.20%     20.03%      35.96%     1.00%         1.74%       4.74%       3.1          3.1
 7/16/2007     -6.23%      1.01%     -8.60%   -21.59%    -9.18%        -0.97%     19.26%      83.46%     0.63%         2.04%       4.86%       1.8          1.2
  6/6/2008     -7.96%     -6.11%    -37.88%   -30.98%    4.89%        -17.17%    -65.16%     -52.41%     1.77%        -1.10%      -1.15%       1.9         -3.8
  6/1/2009     -1.66%      9.03%    15.76%     13.56%    4.44%         9.25%      12.49%      4.53%      0.81%         1.55%       2.13%      -3.8          2.4
 2/23/2011                                                                                                                                     2.8
      AVG      -1.10%    -0.08%     -2.18%    -1.93%      1.42%       -2.43%       -4.96%    8.74%       1.01%        1.48%       3.07%       2.3          1.2
AllMonthsAVG    0.64%     1.86%      3.82%    7.80%       1.07%       3.47%        7.18%     13.18%      0.64%        1.34%       2.69%       2.6          2.5
     T-Stat     -1.10     -0.69      -0.95     -1.45       0.14        -1.06        -1.03     -0.27       1.74         0.36        0.57                   -1.59
      # Up         3         5          5        5           5           3            4         4           9            8           8                      7
    # Down         6         4          4        4           4           5            5         5           0            1           1                     2.0
   ** Market data provided by Bloomberg unless otherwise noted.       SEE IMPORTANT DISCLOSURES ON THE LAST PAGE OF COMMENTARY
                         Nautilus Capital Research                 Page 12 of 19                         The Case for a Cyclical Top
Part II: Dr. Copper
                                            — Excerpt ‘Daily Market Outlook,’ 3/22/2011
                         10 Reasons to Sell Copper
In our March 8th “Dr. Copper” piece we presented an objective measurement for
signaling long-term copper tops (i.e.. a 10% decline after a tripling of copper price)
and noted the proximity of the next signal. We further linked these historical cop-
per peaks, as a leading indicator, to cyclical tops for both stocks and the economy.
Since that note, copper fell further triggering a 10% decline on March 15th, after a
2 year run up of 267%. Over the past week, copper has since bounced 5% offering,
in our view, an ideal tactical opportunity to place long-term bearish bets. Below,
we provide 10 reasons to make that bet:

1)  Long-term Top Study (see table below): there have only been 8 other times
    in history (back to 1800, source: GFD) that copper has tripled off a low then
    declined 10%. All 8 times copper was lower 1 year out and 3 years out by an
    average amount of 30%
2) Bearish Near-term Momentum Study (see March 8th note): since 1989,
    there is a strong bearish statistical bias for copper 3-6 months after making a
    new 6 week low for first time in 6 weeks, as occurred recently on March 9th.
3) Waning Technical Momentum: recent peak (Feb 14th) occurred on declin-
    ing open interest, declining volume, and declining price RSI
4) Institutional Exuberance:           “Large Spec” net long positions in futures
    (mainly hedgefunds) reached a 6 year high last month at + 32,000 contracts
5) Retail Exuberance: the 50 day average of retail bullishness reached 80%
    bullish last month (source: Daily Sentiment Index, trade-futures.com), the
    highest in 5 years. Also, shares outstanding (money flow) into the JJC
    (copper ETF) has plunged 19% in the past 3 weeks after a bubbly mountain of
    inflow since its launch in 2008
6) Technical Resistance: at every time frame — see 3 charts right
7) Contango in Forward Curve: copper futures have spent much of the last
    decade in backwardation, a condition reflecting tight supplies. The forward
    curve (front month / 12th month) has now fallen back into contango in recent
    weeks
8) Housing Starts Plunge: the bear market in housing appears to be getting
    worse, as witnessed by last week’s multi decade low in Housing Starts
9) China Copper Imports Plunge: (CNIVCOPP Index in Bloomberg) in Febru-
    ary fell to their lowest level since the 2008 crisis, reflecting China’s attempt to
    cool inflation and its real estate market with more restrictive monetary policy
10) Inventories Rising : Comex Copper inventories have jumped 32% since the
    beginning of the year


                                              Signal of a Long-term Copper Top
     Forward Copper Returns After Declining 10% After a > 200% Rally, 1800-Present [Datasource: Global Financial Database]

      Event Date               1 Month                3 Months              6 Months            1 Year               2 Years        3 Years
       4/30/1865                -9.09%                 -18.18%              -25.45%            -9.09%                -17.27%        -40.00%
      12/21/1916                -8.00%                 16.00%                0.80%             -24.80%               -16.80%        -43.20%
        4/5/1937               -14.71%                 -17.65%              -17.65%            -41.18%               -33.82%        -26.47%
        7/9/1956               -13.04%                 -13.04%              -21.74%            -36.41%               -45.65%        -31.52%
       4/20/1966                -4.13%                 -1.76%               -23.44%            -42.89%               -38.69%        -21.07%
       5/16/1974               -16.03%                 -31.15%              -47.51%            -53.32%               -43.19%        -50.00%
      12/29/1988                6.40%                   1.59%               -21.53%            -24.99%               -17.39%        -31.04%
        6/1/2006                -4.08%                 -3.18%               -12.34%            -4.65%                 1.13%         -35.65%
       3/15/2011
          AVG                   -7.84%                 -8.42%               -21.11%            -29.67%               -26.46%        -34.87%
      AllDaysAVG                0.34%                   1.03%                2.12%              4.01%                 7.85%         11.30%
         T-Stat                  -3.16                  -1.83                 -4.82             -5.60                 -5.87         -13.26
          # Up                     1                      2                     1                 0                     1             0
        # Down                     7                      6                     7                 8                     7              8

     ** Market data provided by Bloomberg unless otherwise noted.      SEE IMPORTANT DISCLOSURES ON THE LAST PAGE OF COMMENTARY
                          Nautilus Capital Research                 Page 13 of 19                     The Case for a Cyclical Top
Part II: Commodity Reversal
                                                — Excerpt ‘Daily Market Outlook,’ 5/6/2011
                                                    What Yesterday’s Commodity Collapse Could Mean
Driven by historic declines in silver and crude oil, the CRB Index fell –4.90% yesterday only a few days removed from making a 2.5 year high. We studied
large 1-day commodity declines back to 1957 and, without ay filters, found no significant forward directional bias for either the CRB or the SPX. How-
ever, when isolating declines that occurred in the vicinity of a one year high in CRB, we do see some significant tendencies. Specifically, the CRB & SPX
returns after those sharp CRB declines near a high are summarized in the table and chart below. As one can see, there tends to be a strong CRB rally over
the next 3-5 months before fizzling out. In contrast, the SPX, while also bouncing near-term, eventually succumbs to a significant decline over the next
year that is over 20% peak to trough on average — i.e. a bear market. Similarly, looking back even further (1914-present) on monthly data, we find that
the current pattern in CRB, an 8% decline after a 50% rally, is a typical precursor of bear market declines for stocks while it is less bearish for commodities
themselves — see table and chart at bottom.

          CRB & SPX Daily Returns After CRB has a 3 standard deviation decline within 2 weeks of a 1 Year High, 1957-Present

             CRB Forward Daily % Return                     SPX Forward Daily % Return
Event Date    1 Day    20 Days     60 Days 252 Days          1 Day    20 Days 60 Days       252 Days
 3/1/1961    -0.32%    -1.33%       1.79%   -0.23%           0.66%     2.36%   4.46%         10.67%
11/18/1963   -0.52%    -1.01%      -0.81%   -1.30%           0.10%     3.90%   7.87%         19.77%
10/20/1969    0.00%     0.87%       1.16%   2.22%            0.77%    -0.05% -4.96%         -12.63%
11/18/1969   -0.19%     0.39%      -0.19%   0.58%           -0.51%    -7.46% -10.22%        -13.64%
10/2/1972     0.17%     0.41%      12.78%   58.09%           0.13%     0.39%   7.16%         -1.59%
12/13/1972    0.45%     1.34%       9.90%   48.47%          -0.27%    -0.10% -3.02%         -21.31%
12/18/1972   -0.53%     3.70%      11.78%   49.85%          -0.48%     1.67%  -4.05%        -18.89%
3/13/1973     0.20%    -2.10%      13.92%   46.98%           0.44%    -1.98% -7.55%         -13.39%
 6/6/1973    -1.76%     5.39%      14.05%   12.18%           1.47%    -2.43% -0.41%         -13.42%
5/18/1987     0.14%     1.35%      -2.26%   4.77%           -2.45%     6.32% 15.96%          -9.75%
6/29/1988     1.67%    -7.19%      -8.17% -10.00%            0.93%    -1.83% -0.45%          20.23%
7/11/1988     1.44%    -2.34%      -5.96%   -9.87%          -1.00%    -0.21%   0.03%         20.87%
 8/5/1993    -0.49%    -0.94%       0.31%   6.77%            0.12%     2.94%   4.40%         2.29%
6/20/1994    -0.25%    -0.29%      -1.91%   0.71%           -0.91%    -0.36%   2.92%         19.70%
 7/5/2000    -0.69%     0.52%       2.73%   -6.29%           0.72%    -0.52%   0.83%        -15.70%
3/17/2008     1.92%     4.59%      11.85% -45.50%            4.24%     4.53%   4.61%        -39.05%
3/19/2008    -1.69%     8.02%      14.83% -41.98%            2.39%     5.17%   4.74%        -39.62%
11/12/2010    0.80%     5.36%      11.80%                   -0.12%     3.44% 10.15%
11/16/2010   -0.27%     7.64%      14.03%                    0.02%     4.83% 12.80%
3/15/2011     0.01%     6.18%                               -1.95%     2.52%
 5/5/2011
     AVG      0.00%     1.53%      5.35%        6.79%       0.22%        1.16%     2.38%     -6.20%
AllDaysAVG    0.01%     0.22%      0.67%        3.09%       0.03%        0.57%     1.71%     7.26%
    T-Stat    -0.03      1.53       2.64         0.52        0.58         0.80      0.43      -2.85
     # Up        9        13         13           10          12           11        12         6
   # Down       10         7          6            7           8            9         7        11

                            CRB & SPX Monthly Returns After CRB declines 8% After Rallying > 50%, 1914-Present

              CRB Monthly % Return                          SPX Monthly % Return
                                          12
Event Date 1 Month 3 Months 6 Months               1 Month      3 Months 6 Months 12 Months
                                         Months
  Jul-17     2.44%    6.21%      8.47%   9.34%     -2.96%       -12.63%      -17.02%       -14.74%
  May-23     -6.82%   -7.12%    -2.73% -16.86%     -7.71%        -4.47%          -2.57%    -1.89%
  Aug-33     -2.32%   -6.56%     3.09%   8.88%     -11.35%      -10.90%          -3.06%    -17.59%
  May-37     -4.09%   -5.45% -21.25% -32.83%       -5.27%        -1.32%      -31.68%       -42.99%
  Apr-47     -5.34%   -7.56% 13.55%      5.87%     -0.92%        8.12%           5.79%     6.13%
  Jun-51     -4.66%   -4.16%    -4.28% -14.47%      6.87%       10.97%           13.41%    19.08%
  Oct-73     3.02%    16.75% 10.18% 20.79%         -11.39%      -10.82%      -16.60%       -31.76%
  Mar-80     0.04%    11.01% 23.80% 15.66%          4.11%       11.90%           22.89%    33.22%
  Sep-06     0.09%    0.55%      3.70%   9.19%      3.15%        6.17%           6.36%     14.29%
  Jul-08     -5.93% -35.55% -47.08% -38.17%         1.22%       -23.56%      -34.84%       -22.08%
  May-11
   AVG       -2.36%   -3.19%    -1.26%   -3.26%    -2.42%        -2.65%          -5.73%    -5.83%
 AllMonth-
             0.20%    0.70%      1.47%   2.92%      0.59%        1.84%           3.70%     7.70%
   sAVG
  T-Stat      -2.26   -0.87      -0.43     -0.94    -1.48           -1.19        -1.57      -1.77
   # Up        4        4          6        6           4            4             4         4
  # Down       6        6          4        4           6            6             6         6

   ** Market data provided by Bloomberg unless otherwise noted.                   SEE IMPORTANT DISCLOSURES ON THE LAST PAGE OF COMMENTARY
                            Nautilus Capital Research                       Page 14 of 19                     The Case for a Cyclical Top
Part II: Emerging Market Woes
                                        — Excerpt ‘Daily Market Outlook,’ 5.3.11 & 5.19.11




 ** Market data provided by Bloomberg unless otherwise noted.      SEE IMPORTANT DISCLOSURES ON THE LAST PAGE OF COMMENTARY
                      Nautilus Capital Research                 Page 15 of 19                  The Case for a Cyclical Top
Part III: Spotting the Top
                                        — Excerpt ‘Daily Market Outlook,’ 5/20/2011
                 # of Trading Days                                                              Cyclical Top Patterns
Cyclical Bull                         At the start of the year, in our 2011 outlook, we forecasted a cyclical top in SPX around the 1350 level in SPX by August of this
                Spent Within 5% of
Market Peak                           year. We have spent the time since then highlighting the many leading indications that our forecast remains on track, for example:
                     Price Peak
                                      diminishing NYSE new highs, defensive leadership, small-cap under-performance, EM underperformance, crude oil spike, copper
 1/19/1906              23            weakness, decoupling of stocks and bond yields, etc… We now feel there is enough evidence to start shifting from “leading” indi-
 11/19/1909            113            cators to the more coincident or even lagging signs of a cyclical top. Today’s note proposes three technical conditions to watch
                       166            that have generally occurred at, or just after, the last 23 cyclical tops since 1900. The first observation is that cyclical tops take a
 9/30/1912
                                      long time to form. The table left shows that, on average, the market spends 120 trading days (6 months) within 5% of the final
 11/21/1916             32            price peak, both before it and after it. Then, the typical first technical trigger near the top is the occurrence of the 3 month rate of
 11/3/1919              18            change turning negative having been positive for a long stretch. Currently, the SPX has spent 80 trading days within 5% its April
                        22            29th peak (so, in the ball-park) and its 3 month rate of change is just turning negative right now — see chart below. The second
  9/3/1929
                                      and final trigger, one’s last chance to recognize the top, is typically a “retest” pattern where the market retraces about 2/3rds of the
  2/5/1934             195            initial decline off the peak. The six charts below (1909,1937,1962, 1966, 1981, 2007) hopefully provide clear examples of what
 3/10/1937              47            to look for, but feel free to contact us for further discussion.
 11/9/1938              54
 5/29/1946             123
 6/15/1948             117
  8/2/1956             165
 12/12/1961            101
  2/9/1966             251
 11/29/1968            153
 1/11/1973              80
 9/21/1976             212
 11/28/1980            187
 8/25/1987              41
 7/16/1990             237
 7/17/1998              69
 3/24/2000             193
 10/9/2007             170
  Current               80
  Average              120




 ** Market data provided by Bloomberg unless otherwise noted.         SEE IMPORTANT DISCLOSURES ON THE LAST PAGE OF COMMENTARY
                      Nautilus Capital Research                   Page 16 of 19                               The Case for a Cyclical Top
Part III: The Retest Pattern
                                           — Excerpt ‘Daily Market Outlook,’ 3/29/2011
                Cyclical Top “Retest” Table                                                         The Retest Pattern
                                                                       The SPX fell –0.27% yesterday, nearly staging an outside day reversal, on
                                           Retest Re-   Retest Dura-   the heels of a weakening in commodity prices that is spilling into today’s
Cyclical Top Initial Decline
                             Retest Date   tracement     tion (trade
   Date             %
                                           Percentage       days)      session. The rally since the March 16th low has retraced two thirds (66%)
                                                                       of the decline off the Feb 18th high. At the risk of being overly provoca-
6/17/1901        -12%        8/26/1901       51%             34
1/19/1906        -10%         4/3/1906       52%             50
                                                                       tive, today’s note provides some reason to carefully consider the impor-
11/19/1909        -4%        12/29/1909      73%             27        tance of the current juncture. We have already clearly established our
9/30/1912         -5%        11/21/1912      39%             37        longer-term view — i.e. that a
11/21/1916       -21%        3/20/1917       48%             80        cyclical top in SPX will made
11/3/1919        -13%         1/5/1920       33%             40        this year from around our
9/16/1929        -10%        10/10/1929      67%             18        1350 bull market target. The
7/18/1933        -21%        8/28/1933       63%             29        table to left of the 23 cyclical
3/10/1937        -19%        8/13/1937       61%            109
                                                                       tops over the past century
11/9/1938        -11%         1/4/1939       62%             36
5/29/1946        -10%        8/14/1946       43%             53
                                                                       highlights a relatively consis-
 8/2/1956        -10%        11/5/1956       58%             66        tent tendency for tops to be
12/12/1961        -7%        3/15/1962       67%             64        “retested” within a month or
 2/9/1966         -7%        4/21/1966       76%             49        two of the top. The median
11/29/1968       -10%        5/14/1969       79%            109        percentage retracement of the
1/11/1973         -8%        3/14/1973       44%             42        initial decline is 62% in the
9/21/1976         -8%        12/31/1976      96%             70        span of a median 42 trading
11/28/1980        -9%         1/6/1981       82%             25
                                                                       days putting the current SPX
8/25/1987         -8%        10/5/1987       67%             28
                                                                       juncture (66% retrace in 24
7/16/1990         -9%        8/16/1990       17%             23
7/17/1998        -10%        8/19/1998       28%             23
                                                                       trading days) right in that historical wheelhouse. Though we are still al-
3/24/2000        -11%         9/1/2000       96%            112        lowing for more wiggle room for the final top to be made (1350-1410 zone
10/9/2007        -10%        12/10/2007      69%             43        thru the end of 2011), a roll over from the current juncture will be pretty
 MEDIAN          -10%                        62%            42         concerning in light of these historical retest patterns.
 2/18/2011        -6%        3/25/2011       66%            24




   ** Market data provided by Bloomberg unless otherwise noted.        SEE IMPORTANT DISCLOSURES ON THE LAST PAGE OF COMMENTARY
                         Nautilus Capital Research                Page 17 of 19                    The Case for a Cyclical Top
Part III: Forecast




                                                                                                                        Duration Months of Next
 SPX Cyclical Bulls in Secular Bears        Bull Duration Months            Bull % Return      % Decline of Next Bear
                                                                                                                                 Bear



             1907-1909                                24                        90%                    -27%                       22

             1911-1912                                12                        29%                    -44%                       22

             1914-1916                                23                        107%                   -40%                       13

             1917-1919                                22                        81%                    -47%                       22

            1932 - 1934                               19                        169%                   -23%                       6

             1935-1937                                24                        132%                   -54%                       13

             1938-1938                                7                         62%                    -46%                       41

             1966-1968                                25                        48%                    -36%                       18

             1970-1973                                32                        74%                    -48%                       21

             1974-1976                                24                        73%                    -19%                       17

             1978-1980                                33                        62%                    -27%                       21

             2002-2007                                63                        96%                    -57%                       17

             AVERAGE                                  26                        85%                    -39%                       19

           2009-Present                               26                        102%


 ** Market data provided by Bloomberg unless otherwise noted.      SEE IMPORTANT DISCLOSURES ON THE LAST PAGE OF COMMENTARY
                      Nautilus Capital Research                 Page 18 of 19                  The Case for a Cyclical Top
                                                                       Disclaimer
Important Disclosure. The information provided in this material has been prepared by Nautilus Capital, LLC (“Nautilus”) for institutional investors and is
intended strictly for research and informational purposes only. This material is not intended for natural person individual clients and no claim or represen-
tation is made thereto. All information contained herein is considered current as of the date listed on the first page of this material. This material has been
prepared solely by Nautilus and is provided without warranty of any kind, either expressed or implied. All information, including that used to compile
charts, is obtained from sources believed to be reliable, but Nautilus does not guarantee their reliability. The information contained herein has not been
independently verified. When evaluating the results of any prior Nautilus trading models or recommendations, one should also consider that Nautilus may
substantially modify the methods it uses to evaluate investment decisions. Nautilus uses various methods to evaluate investments which may, at times,
produce contradictory recommendations with respect to the same securities. Pricing information listed in this material is indicative and is not intended as
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Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, invest-
ment strategy, or product made reference to directly or indirectly in this research material, will be profitable, equal any corresponding indicated perform-
ance level(s), or be suitable for every investor. Subsequently, investors must make their own investment decisions based upon their specific investment
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Hypothetical composite models developed by Nautilus are constructed to serve as a general directional forecasting guide for the corresponding index.
Models are typically prepared on a short-term and long-term basis. Each model is composed of several individual factors that are scored independently
based on their utility in forecasting the index in isolation.

The hypothetical performance results of the models have inherent limitations. No representation is being made that any investment will or is likely to
achieve profits or losses similar to those shown herein. In fact, there are frequently sharp differences between hypothetical performance results and the
actual results achieved by a particular investment or trading program. One of the limitations of hypothetical performance results is that they are generally
prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely
account for the impact of financial risk in actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of
losses are material points which can adversely affect actual results. Because hypothetical results do not involve actual trading, the results do not reflect the
deduction of transaction and custodial charges or the deduction of management fees, the incurrence of which will have a negative effect on actual perform-
ance. In addition, for reasons including variances in actual holdings; variances in fees and expenses charged; market fluctuation; the date on which invest-
ing begins; and any contributions or withdrawals; the performance for a specific investor may vary substantially from the information presented in this ma-
terial. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully
accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results.

** Market Data used in proprietary modeling, charts and studies provided by Bloomberg



                                                     Nautilus Capital, LLC
                                                            www. nautilus-cap.com



                                                                                            James Cutting, CMT
                   Thomas Leveroni, CFA
                                                                                            Technical Analyst / Research Sales
                   Chief Market Strategist
                                                                                            james@nautilus-cap.com
                   tom@nautilus-cap.com
                                                                                            Phone: (847) 615-1618
                   Phone: (508) 883-1919
                                                                                            Cell:    (847) 209-6200




                                                                                            John Karle, CFA
                   Shourui Tian, PhD
                                                                                            Institutional Trading
                   Quantitative Analyst
                                                                                            john@nautilus-cap.com
                   Shourui@nautilus-cap.com
                                                                                            Phone:     (203) 353-7620




Nautilus Capital Research                                                Page 19 of 19                                 Daily Market Outlook

				
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