Bulls Zen Bears

Volume 2, Issue 8

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EQUITY LOWS ARE RETESTED ONE MORE TIME JUST LIKE 2002 – 2003. A WHOLE HOST OF FACTORS ARE BETTER NOW THAN THEY WERE AT THE OCTOBER AND NOVEMBER 2008 LOWS, SO THE RETEST SHOULD BE SUCCESSFUL. EURO TURNS POSITIVE VS. YEN. BUY SIGNAL FOR CHINESE STOCKS. SELL GOLD AND GOLD STOCKS.

Equity markets reached a panic low on Oct. 10, 2008 and then declined to a lower capitulation low six weeks later on Nov. 21. While a double bottom is a classic pattern, retesting the low for the third time is not without precedent. In fact, it happened at the end of the last bear market. The 2002 – 2003 bear market ended with a double bottom on July 24, 2002 and Oct. 10, 2002. Even though equity markets improved into the end of 2002, it seemed very likely that the US would invade Iraq in early 2003. Therefore, most of the gains made after October were lost in early 2003 until a week before the invasion began. Equity markets started a give year rise on Mar. 13, 2003, one week before the invasion of Iraq, just as the SARS virus was causing fears of a global epidemic. You can see the arrows marking these three lows on the chart of the SP 500 Index below. The TSX and most global markets followed exactly the same trend. A chart further below shows a current price of the SP 500 with the arrows marking the October and November 2008 lows.

How the SP 500 Index and most other global markets retested the lows one more time in March 2003 before a major advance.

The Dow Jones Industrial Average has declined below the November lows while the SP 500 and the TSX are trading right at the lows. In the past, markets have remained above the lows 61% of the time and moved below them 39% of the time. A chart such as the one below does not in any way convey the fear and anxiety that accompanied the lows in March 2003 just before a war was expected to occur. I recall it being very similar to the apprehension we feel today. When news of the SARS virus spread, fear increased, but equity prices kept rising.

In 2003, there was widespread fear and pessimism due to years of stock market declines, the threat of war and a global epidemic. In spite of this, the markets started a powerful rally that lasted 12 months before a small decline. Now, the current financial crisis is causing fear and pessimism. I have found that the situation is always different, but the patterns of markets, as determined by investor behavior, are often very similar.

As the market averages test the lows, it is important to be aware of some of the many factors that are better now than they were during the October and November lows. Here is a brief list addition to the factors mentioned last week: one month US Treasury Bill are yielding 0.16% instead of less than 0% percent, the Canadian dollar is at $0.80 US instead of $0.77 US, the euro is higher compared to the Japanese yen (the euro usually declines as the flight to safety increases), the Dow Jones Utility Index is 11% above the lows, the US Semiconductor Index is up 14%, the Chinese stock market (the Chinese economy is becoming more influential) is 26% higher, gold stock indexes are 100% higher, US retail sales were up for the first time since last July, real estate sales in California were up 100% in 2008 compared to 2007 and the Conference Board’s Leading Economic Indicators (LEI) have been up for two months in a row. The worst of the recession has just about always been seen when the LEI are up for three consecutive months. One more month to go? This all suggests that the retest should be resolved with a move to the upside just like 2003.

Bonds - The trend for bond prices is still down.

Commodities - Gold and gold stocks are likely to at least pause in the weeks ahead. Does this mean that the financials are bottoming? Oil is building a base, but no breakout yet.

Currencies – A buy signal is issued for the euro vs. yen. CAD$ vs. US$ is steady.

This chart of the SP 500 as of last Friday, three months after the Nov. 21 lows. A five-month period of base-building like this usually happens before a rise, not a sharp decline.

I am reprinting this table created by Dr. Janice Dorn, a financial psychiatrist (janice@thetradingdoctor.com). I am grateful for her permission to publish it here for you.

This shows typical investor emotions during a market cycle. I would say that the Oct. 10, 2008 low was the panic stage and the Nov. 21 low was the capitulation stage. There is not nearly the action and volatility now compared to October and November lows so it makes sense that this is the despondency stage, which usually occurs before a rise. Depression is the next stage. This occurs as the markets rise, because investors have no faith that it will last. When it does, hope returns.

This index of US bank stocks shows that it has lost 82% of is value since it peaked exactly two years ago from today. It has declined 51% just this year alone! This sector has dragged down the global market averages. Even though some US and all Canadian bans are very healthy, the poor decisions of the minority are hurting them all. I believe hedge funds are short the financials and long gold. How much more profit is left in shorting when the cost to buy a share of Citicorp or Bank of America cost less than a greeting card? The financials continue to be very oversold. It was good to see the BKX refuse to decline today.

Dreadful performance of US financials is responsible for much of the weakness in the TSX and other global markets. It is positive to see the oscillator so much higher than it was at the lows last fall.

The long-term oscillator for US markets are declining but are also higher than they were earlier. This has sometimes been a positive sign in the past.

Most will be flabbergasted to see the stock market of a communist country lead all other world markets to the upside. It is up 26% from the October low. The two green dots on the far right show that it is the first major market in the world to turn positive for the long term! You can see how accurate this indicator has been to determine the long-term trend in the past. China has $2 trillion in cash and is spending over $500 billion in a stimulus plan. This is very positive for the global economy, commodities and stock prices everywhere.

Gold and gold stocks have had a good run since a buy signal was issued on Nov. 24, 2008. The Canadian Index of gold stocks is up 40% and this US index is up 36% since then. Since the oscillator is so high and rolling over, it suggests that prices are due to at least pause, if not decline for a month or so. That is all it means at this time.

A buy signal was also issued for gold on Nov. 24 at $828. This was confirmed with a longer-term buy signal for gold and gold stocks on Dec. 29. At today’s price of $995, gold is up 20% since Nov. 24 and 13% since Dec. 29. Since gold has peaked when financials bottom, the inability for gold to rally much above $1,000, could have positive implications for equities and financials.

Oil is flat with a positive bias. It is down since a buy signal was issued for only one half of a normal position on Jan. 5, 2009 at $48. In hindsight, I should have waited for a few positive days before issuing the buy. That is one of the shortcomings of a weekly update instead of a daily one.

The euro sold off sharply when equities hit lows in October and November. Therefore, it is very interesting to see the euro turn positive vs. the yen when we are retesting the lows again! Buy 50% of a normal position now. This suggests that perhaps there is no more leverage to be eliminated. (Some investors borrowed yen at low interest rates to invest in equities.) It is an encouraging sign that this retest should be successful. The flight to safety and quality is not as strong as it was last year.

Volume 2, Issue 7

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THE BIG PICTURE — A SNAPSHOT OF REAL ESTATE, CREDIT MARKETS, EQUITIES AND THE ECONOMY. BASE-BUILDING IS FRUSTRATING, BUT IT IS A CHARACTERISTIC OF A BOTTOME BEFORE A RISE. INFLUENTIAL FINANCIAL STOCKS ARE SHOWING SIGNS OF TURNING UP.

In this issue, let us take a look at the bigger picture. Careless lending and borrowing caused a bubble in the real estate prices, especially in the US and the UK. The swift decline in real estate prices which followed caused world credit markets to seize up. This caused fear and reduced business transactions, resulting in a sharp decline for global stock markets and economic activity everywhere. We know that almost no one saw this financial crisis coming. It only stands to reason that very few ill likely see the recovery coming either. Therefore, let us look at some of the indicators that showed signs of trouble to see how they are acting now.

North American equity markets are approximately 10% higher than they were at the Nov. 21, 2008 low, but they have already made no progress since the end of November. This is very frustrating for investors because there is little confidence that the markets will not decline to lower lows at anytime. History can provide some guidance here. A sharp decline followed by a quick rise (known as a V-bottom) is characteristic of a rise in a longer-term decline. A double bottom and/or a period of base-building such as we are enduring, is just about always a sign of a market bottom before a rise, not the precursor of a decline. See examples of V-bottoms and a base-building bottom below.

Toll Brothers is one of America’s biggest home-building companies. You can see that the share price peaked in 2005 before US real estate price peaked. The share price has been hovering around the $20 level for over a year even though new home sales and prices keep dropping. This could be a sign that the worst-case scenario for home prices has already been factored into equity prices. The US Homebuilding Index (XHB) only goes back to 2006.

It is also interesting to look back to see what history can teach us about what usually happens after severe economic recessions and stock market declines. The worst recessions and bear markets in recent history occurred in 1973 – 1974 and 1982. Those were also the only times that stock prices were as undervalued as they are now. In 1980, commodity prices and inflation seemed to be rising out of control in North America. By late 1981 the inflation rate was approaching 2,000% per year in South America. In a desperate effort to break the back of inflationary psychology, US Federal Reserve Chairman Paul Volker increased US interest rates higher than 15% in late 1981, the highest rate in history. North American banks and the IMF had loaned billions of dollars to Brazil and Argentina, which could not be repaid due to the collapse of the commodity bubble. In spite of the doubt at the time, monetary police was successful once again.

Now, the collapse of the housing bubble has caused massive losses for US banks and deflation as the concern. There is little confidence that a monetary policy of zero percent interest rates can jolt global economies back to life. Paul Volker has become one of Obama’s Economic Advisors. After 1974, it took 15 months for US markets to come close to record highs again. In 1982, it took less than 6 months. Signs of economic improvements came many months after stock prices turned up. History shows that appropriate US monetary policy works over time.

Technical indicators changed very little this week. However, the long-term oscillators are showing signs that the influential financial stocks could be bottoming and on the verge of turning up longer-term. Usually a government announcement is the catalyst for a strong rise in equity markets. Hopefully that will happen soon.

Bonds - Government bonds are weak as money flows into corporate bonds. This is positive action.

Commodities - Gold is overbought but still positive. Oil might be forming a double bottom.

Currencies - The euro and CAD$ have also been base-building for months. The CAD$ is looking a little more positive compared to the US$. Equities, commodities, and currencies will likely move together.

The TED Spread is the rate that banks charge to lend to each other. You can see that it has declined from 5.22% in October to 0.93%, which is very close to the normal rate of 5%. Credit conditions have improved.

This is the difference between the interest rate on US 10-year government bonds and corporate bonds. This rate has declined from 6.22% on Dec. 20 to 5.02% now. Over $75 billion of new corporate bonds were sold in the first 6 weeks of 2009 compared to only $23 billion for December. This shows that confidence is returning to the corporate debt markets. The credit crisis is definitely easing.

US stock prices have been marking time for four months since the Oct. 10 lows. No more new lows since Nov. 21.

After spiking over 80 on the October and November lows, the Volatility Index is now down to 43. It is down to where major market bottoms have occurred before (marked by the arrows). It is now at more normal extremes of investor fear. There is still much room for improvement for the VIX and equity markets.

This gives us an indication of the cost to ship raw materials to ocean vessels. After skyrocketing and collapsing along with commodity prices, rates have now tripled from 665 in December to a more normal 1,900. This is a good sign of the economy. China’s $581 billion stimulus program appears to be working.

V-bottoms occurred during the bear market in 2001 and July 2002 as marked by the arrows. The double bottom in October 2002 to slightly lower lows marked the end of the declining phase. After all, many investors believed that an invasion of Iraq was coming. When that happened in March 2003, the new bull market started. Markets have recently experienced double bottoms. What will be the catalyst this time?

The DJIA declined 45% during a severe recession in 1973 and 1974. To the surprise of most experts and investors, the DJIA recovered almost all of its losses 15 months after the double bottom on Dec. 6, 1974.

In 1981, the commodity bubble burst and a severe recession began. By the spring of 1982, banks were on the verge of collapse as 15% interest rates destroyed businesses. Lower rates brought markets to record highs by the end of 1982. Do not underestimate the power of monetary policy and interest rates, even if it takes time.

Coming back to the present, a recovery by the US financial stocks helped the markets recover after the long-term oscillators bottomed and turned up on Nov. 24, 2008. After the oscillator turned down again in early January, US financial stocks fell 35% and held the equity markets back. The oscillator for the financial sector is showing signs of bottoming and turning up once more. A rise by this sector would greatly help the equity markets. This could hurt gold prices. Note the higher lows for the oscillator since July 2008.

The long-term oscillator for the DJIA has been declining along with the financials since early January. However, each low on the oscillator is higher than the previous low. This is another indication that this base-building stage should be resolved by a move to the upside.

While the euro is still weak relative to the US$ and the yen, the CAD$ is showing signs of improvement vs. the US$. The oscillator is staying positive. Higher oil prices would be very helpful to help move the CAD$ out of its trading range. Brazil, Canada, and China seem to be in the best position to recover from this crisis.

Volume 2, Issue 6

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THE UPTREND WAS SKATING ON THIN ICE DURING JANUARY BUT REACHED A MUCH MORE SOLID SECTION LAST WEEK. THE MARKETS HAVE PROBABLY SUCCESSFULLY RETESTED THE NOVEMBER LOWS. FURTHER STRENGTH THIS WEEK COULD HELP INVESTORS REALIZE THAT THE GLASS IS HALF FULL INSTEAD OF HALF EMPTY.

In fall, equity markets fell sharply for six weeks from Sept. 2 to Oct. 10. Markets usually retest their lows six to seven weeks later so the Oct. 14, 2008 update headline stated that "markets could still be volatile until December before a major rise is likely to begin." Global equity markets rose before the US election but then fell to lower lows exactly six weeks later on Nov. 21. After such a gut-wrenching decline, the Nov. 21, 2008 update was one of the first reports to state that the "base-building stage is over and a new uptrend appears to be starting." I had the confidence to make a bold statement like that at such a frightening time because the long-term oscillators had finally turned up for the markets and the financial sectors.

While the Nov. 21 low was a retest of the Oct. 10 low, it was not a very constructive one, since the November low was 11.8% lower for the SP 500 and 13.5% lower for the TSX. A low within two to five percent of the previous low is normal. The strongest rebound since 1932 followed the Nov. 21 low, but a lower low of the magnitude did not produce confidence that the bear market was over. Therefore, the markets sold off soon after the New Year to see if the November lows would hold. The US financial stocks plunged to new lows on Thursday, Feb. 5, as the Dow Jones Industrial Average dropped to a level that was only 5.3% above the November lows. By the end of the day, the DJIA rose 2.8% to close above the 8,000 level again. However, the low for the SP 500 was 10.7% above the November low and the TSX low was 12.5% higher. While the November low was a retest of the Oct. 10 low, the low last Thursday has all the hallmarks of being a successful retest of the November lows.

The Volatility Index peaked at a much lower level in January than in October and November. The short-term and long-term trend indicators for the VIX are both red. This means that the VIX is in a declining trend, which is positive for equities.

In recent weeks I have been saying that the indicators were mixed but with a positive bias. It seems like they have been very helpful again during one of the most uncertain times. This is how much prices have gained from the November lows to the end of last week:

The Dow Jones Utilities Index, which usually leads the markets, is up 30.9%. While finanical stocks fell to lower lows last week, a host of commodities and currencies also had successful retests of previous lows. V bottoms (when the market goes down and then right back up again) are signs of a bear market. Periods of base-building and retests are characteristics of a market bottom before a major rise. While the indicators are still mixes, many more indicators are positive today compared to previous weeks. The market’s reaction to the passage of the US stimulus package and the changes for US financial institutions any day now well shed even more light on future trends. This could be the catalyst that finally produces the powerful move to the upside that investors have been waiting for!

Bonds – US 10-year bond yields have risen from 2.32% when a sell signal was issued on Jan. 12 to 3% today. The indicators are still projecting lower prices and higher yields.

Commodities – The indicators are still trying to stay positive for gold, oil, gold stocks, and energy stocks.

Currencies - The trend for the euro vs. yen is turning positive after a successful retest. The euro and CAD$ are still weak vs. the US$.

The DJU usually leads the markets. You can see (by looking at the red and green lines) that the DJU has been building a strong base of higher lows while the long-term oscillator (olive and pink line) have been rising since November. This has been one of the clues that the market action in the last two months would be resolved to the upside.

The NASDAQ has also been building a good base along with the semiconductor sector. The trend of this sector is a sign of economic strength.

The Canadian TSX has also been strong along with Brazil, the NASDAQ and the DJU index. Canadian financial firms are some of the strongest in the world. Strength in gold has also helped the TSX. The financial situation of the Canadian government is much better than most other countries. Overweight Canada.

The long-term oscillator for the SP 500 has been rolling over, or on the verge of it for several weeks due to the weakness in financial stocks. A positive reaction to the announcements expected this week could turn this back up.

The short-term trend indicators are positive (green) for the TSX, Brazil, China, the UK, NASDAQ, and DJU. The TSX and NASDAQ are now up for 2009.

The long-term oscillators for bonds are still declining as expanding government debt increases the supply of bonds dramatically after a period of extreme optimism.

Gold has risen to the $900 level after a buy signal was issued at $828 on Nov. 24. There are preliminary signs that uptrend for gold prices could be pausing or turning down. The oscillator for gold stocks is identical to this.

The long-term oscillator for oil is still rising even though oil prices are staying close to the $40 range. A buy signal for a 50% position in oil was issued on Jan. 5 at $48.14.

The euro has also been testing the lows with the yen and the US$. So far, it has been successful. The long-term oscillator is turning up for the euro vs. yen. Additional strength for the euro this week would be positive for equities, since it suggests that global investors are becoming more confident to assume risk.

The euro still appears to be weak vs. the US$ even though it has built a very strong base.

Low oil prices has kept the CAD$ from moving out of the trading range even though Canada seems to be in a much better fiscal position than most other countries. As fear subsides, money should move away from the US$ and back to Canada but right now that process appears to be on hold.

Volume 2, Issue 5

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THE CREDIT FREEZE IS THAWING. HOWEVER, US EQUITY MARKETS AND FINANCIALS HAVE YET TO SHOW THE STRENGTH NECESSARY TO END THE BASEBUILDING PROCESS.

There has been a noticeable improvement in credit markets during recent weeks. This is where the problems first appeared last year. In previous updates, charts, and comments have shown that the interest rate spread that banks charge each other over and above Treasury Bills has declined from record highs of 4.3% on October to 0.94% now. This is now back to normal! As the flight to safety intensified late last year, the yield on one month US Treasury Bills dropped below zero. In December, the yield increased slightly to 0.08% but it rose as high as 0.20% today. The rate is also getting closer to what would be considered normal in light of current Fed Funds rates. Another indication of credit conditions is the interest rate spread between US corporate bonds and US 10-year Treasury Bonds as seen in the chart below. This spread increased from 1.75% to 3.5% last March when Bear Stearns collapsed. It then spiked to peak at 6.22% on Dec. 19, 2008, which was one month after the Nov. 21 equity lows. In spite of all the gloomy economic reports, the demand for corporate bonds is now the highest in three months. You can verify this by looking at the chart below. The spread is now down more than three quarters of one percent to 5.42%. This spread peaked at 4% in Nov. 2002, which was also one month after the stock market lows were reached.

While many equity bear markets occur because stock prices moved too high and became overvalued, this bear market was caused by real estate prices moving too high because credit was too easy. The losses from this easy credit eventually hurt stock prices and then the economy. Now that credit conditions have clearly improved, equity markets should also improve. Equity markets had a major advance from the Nov. 21 lows into early January, but US markets have lost much of those gains. For the month of January, the SP 500 was down 8.6% while the TSX was down 3.2%. The US financial stocks were the culprits as the Banding Index (BKX) declined 35%. The long-term oscillators for the US financials are in the extremely oversold level now. It is difficult to determine if the move since November is a short-term rise within a longer term decline that started over 15 months ago (for US markets), or just a continuation of a base-building phase before a major advance. The long-term oscillators for the US markets have turned lower, but the same indicators for the TSX and the Canadian financials have not. As of today’s close, the TSX is still 12.8% above the Nov. 21 lows and the SP 500 is 11.3% higher. Better credit conditions should be positive for equities but market action in the days ahead should provide more clarification about what the shorter-term future holds.

The media has talked about the January effect. In the past, equity markets have often moved up for the year when markets moved higher in January and down when markets moved lower in January. However, the markets were higher in January 2001 when 2001 was a down year and had a very strong year in 2003 when the markets were lower in January 2003. I believe that the best way to determine future trends is to use the tools shown here which show where the money is flowing, instead of where experts think the money should be flowing.

Bonds – Government bonds continued to move lower for the third week after a sell recommendation on Jan. 12.

Commodities – In March, July and October of last year, gold peaked when the financials bottomed. The rise in gold is showing signs of a pause. That might help financials. Oil is trying to stay positive.

Currencies - The US$ and yen are strong while the CAD$ and euro are weak. Most assets seem to be at an inflection point so paying close attention to the markets is important now.

The long-term oscillators for US market averages have turned lower before reaching the overbought level. This could change next week but for the time being it indicates weakness for US markets.

The black line on the lower right is very close to the lowest level reached since 2004. While the US financials could still move lower, this indicates that they should be close to turning around and moving higher. This sector has major implications for equities, commodities and currencies.

The strength in gold, materials, and the relative strength in Canadian bank stocks vs. US banks have enabled the long-term oscillator to stay positive for the TSX. What happens in the US will have an impact on global markets.

The Canadian banks are some of the best and strongest in the world. Even though they have been dragged down by steep losses incurred by their US counterparts, the oscillator is still able to stay positive for now.

The oscillators for US and Canadian government bonds peaked on Jan. 12 as prices peaked and yields were close to the lows. Inflation-adjusted bonds have reached the highest yields in three months! This is very positive since it suggests that investors starting to become more concerned about inflation than deflation. Weakness in government bond prices is another sign that the flight to quality is winding down.

It is hard to see, but the long-term oscillator for gold is peaking. This could merely suggest a pause after the recent rally or something more serious. Since gold has peaked when financials have bottomed, it will be interesting to see how they both react in the days ahead. Could this signal a low for US bank stocks?

Oil seems to be in a base-building phase along with many other assets. From September to December, US Treasury securities, the US$ and the yen all moved up as everything else declined. Now, US Treasury securities are not rising anymore. This is another sign that the flight to quality trade is breaking down.

This is an indicator for shipping rates. A level of 1,500 was normal until 2003. After a huge blow-off to 11,759 in May 2008, it dropped to 663 in December and is now at 1,070, an increase of 61% from the low. This shows that goods are starting to move again and that letters of credit are easier to get.

The euro is weak and bouncing off the lows as equities weaken.

The CAD$ is still weak and base-building, waiting for markets to resolve this base-building stage.

After a strong rally, the euro has given up a good portion of the gains. It is a tug of war between the US$, yen and Treasury Bills against everything else. Market action in the days ahead should help us to determine which side might win.

Volume 2, Issue 4

THE TUG OF WAR IN EQUITY MARKETS CONTINUES. SO FAR, THE OSCILATORS STILL INDICATE THAT THIS IS A CORRECTIVE PHASE IN THE UPTREND THAT BEGAN IN NOVEMBER.

While stocks in many sectors are acting well since the Nov. 21 lows, huge fourth quarter losses and write-downs for US financial companies have cast a shadow upon all stocks, dragging the markets lower. So far this year, the US Banking Index is down 37%, the US SP 500 Index is down 7.9% and the Canadian TSX Index is down 4%. Due to the fact that one sector is having such a negative impact on the markets, the indicators are still mixed, but with positive bias. The long and short-term trend charts for equities are all negative except for the Volatility Index where it is bullish. However, the long-term oscillators continue to move higher, except for the US financial stocks. In the short-term, equities markets and the financials are as oversold as they were at the previous market lows on Oct. 10 and Nov. 21 so they are due to move higher.

As the focus is on corporate earnings up to the end of December, there are some positive signs that economy activity is starting to improve now. Today it was reported that US home prices fell 9.3% but sales were up 6.5% in December instead of declining 2% as was expected. Since the outlook for US housing is so gloomy, very few new homes are being built. Cheaper home prices, lower interest rates and a lower supply of homes has prompted one of the best US economists to predict that US housing prices could bottom as early as this summer instead of sometime next year.

Prices for copper and oil are strengthening while the Baltic Freight Index, which tracks shipping costs is now up 48% from the Dec. 8 low after I reported that it was up 33% last week. This not only shows that the demand for goods and products is increasing, it also shows that this is getting easier to receive letters and lines of credit from lenders. This is a very important trend!

The long-term oscillators are rising for North American market indexes suggesting that the trend is still up. The weakness in US financials has caused this oscillator for the SP 500 to waver a little, but it is moving higher.

The rate that banks charge to lend to each other and US Government Treasury Bills have declined from a peak of 4.3% in October to a more normal 1% now. The Volatility Index that measures investor fear has fallen from the 80 level that it reached during the October and November equity lows to the 50 range during this correction (see the last chart). The 50 level is still extremely high by historical standards, so there continues to be a lot of room for improvement. So far the SP 500 and the TSX are still up more than 10% from the November lows in spite of three weeks of seemingly endless declines. History show that markets have often risen sharply after severe sell-offs like this. In summary, the indicators suggest that equity markets should have at least a strong short-term bounce from here. The character and strength of this advance should provide more evidence for the longer-term picture.

Bonds – Government bond yields continue to rise, and prices continue their decline after I issued an accurate sell signal for government bonds on Jan. 12. According to the oscillators, the trend for prices is down.

Commodities - Gold prices continue to advance over the $900 level in a haphazard way after I issued a buy signal for gold on Nov. 24 at $828. Gold and gold stocks are still positive. Oil prices fell after the Jan. 5 buy signal at $48.14 but are recovering again. The indicators are positive for copper and oil.

Currencies - Sell signals for the euro and the CAD$ were given for a loss last week. While the euro appears weak, the CAD$ vs. USD could turn positive again soon, especially if oil prices move higher.

There is no wavering for the Canadian TSX even though the decline in US financials has negatively affected Canadian bank stocks. The IMF has stated that Canada has the strongest banks and economy in the G7. Investors should have a major weighting in Canada with a low weighting in US equities. Higher prices for gold, oil and other commodities benefit Canada more than the US.

At the same time that oscillators are rising for the equity markets, they are still declining for the financials. However, the green line shows the financials making new lows while the oscillator is not. This may be a positive divergence. This sector needs to turn up to improve the environment for the markets in general. Since prices have dropped close to 30% this year alone, they are due for at least a short-term bounce.

The short-term trend indicator for the TSX was one of the last equity markets to turn red or negative last week. It would not take much of a rise at all for it to turn positive again, which could happen soon if the long-term oscillator stays positive.

The long-term oscillator for Canadian and US long-term bonds turned down two weeks ago after a period of extreme optimism prompting me to issue a sell signal. Extreme optimism usually creates a dangerous situation.

A buy signal for gold was issued on Nov. 24, 2008 at $828 after the long-term oscillator and the short-term trend chart turned positive. This long-term trend indicator turned positive on Dec. 29 at $880. Gold has not been traded at $908 since last July. The trend is still up so far. You can see that this one indicator on its own has been very accurate for the long-term, allowing investors to capture most of the upside and avoid much of the downside.

The price for oil has been extremely volatile since a buy signal was issued at $48.14 on Jan. 5. The long-term oscillator has not wavered in spite of what happened. The short-term trend indicator is green once again so the trend is still up. The oscillator for the Commodity Index (CRB) looks like this too.

The oscillator for the CAD$ vs. USD is still positive but the trend chart is negative. If oil and gold continue to rise the CAD$ could move higher. The federal government unveils its stimulus budget tomorrow but much of the information has already been released.

The long-term oscillator for the euro has turned down for the US$ and the yen, as the euro may be completing a double bottom. New lows vs. the yen would be negative for equities while a recovery would be positive, especially after successfully retesting the previous lows.

The only long-term trend chart to be positive for equities is the Volatility Index (VIX). This peaks and is green when equities decline to reach a low, and turns red as volatility declines and equities recover. You can see two green dots on the far right. In the past, stocks have risen when this has happened, especially from this high level of 46.76. The VIX peaked in the low 40’s (closing levels, not intraday) during major market lows in 1997, 1998, 2001 and 2002.

Volume 2, Issue 3

THERE HAVE BEEN A HOST OF IMPROVEMENTS SINCE THE NOV. 21 LOWS, BUT THE ACTION OF FINANCIAL STOCKS IS THREATENING TO CHANGE THAT. THIS COULD BE A SUCCESSFUL RETEST OF THE NOVEMBER LOWS. SELL SIGNAL FOR EURO AND CAD$.

Looking back to 2008, most all investments fell in September and reached a low on Oct. 10. After a rally into the US election, prices declined even more, to reach lower lows six weeks later on Nov. 21, 2008. After that day, equity markets, currencies, the Volatility Index, the Libor Rate and commodity prices improved in a meaningful way into early 2009. However, since Jan. 5, news of major losses by US and European financial firms caused major declines in their spare prices, which, in turn, have dragged equity markets lower.

If you understand how markets act, you will realize that market prices often retest important lows six to eight weeks later. For instance, the Nov. 21 lows occurred exactly six weeks after Oct. 10 lows. Since the lows, in many cases, were much lower on Nov. 21, than they were on Oct. 10, it is very possible that the declines in the last two weeks is part of the process of retesting the Nov. 21 lows, to see if they will hold. Jan. 23 is eight weeks after Nov. 21 so this is the time frame when a retest should occur if it was going to. Equity markets, the Volatility Index, Libor rate and some commodity prices are significantly better than they were on Nov. 21. Financials, oil and currencies are near or below the lows of two months ago. Therefore, while Nov. 21 low was a retest of of the October lows, this current correction has the potential to be a successful retest of the Nov. 21 lows.

What is important on these oscillator charts are the olive colored and pink lines. The red and green lines show where the respective asset is trading at, which, in this case, is the US SP 500 Index. You can see that the oscillator (olive line) is pausing and turning down slightly. If this turns down by next Monday it will suggest that the uptrend is over. You can see that the Index is higher than it was at November lows. There have also been more issues advancing than declining since December for the first time since September.

While equity and debt prices declined in September 2008, the worst of the declines occurred in October and November. If equity markets and debt prices can continue to hold on to the gains made since November, the steep losses now reported by some of the US and European financial firms for the final quarter of 2009 could be the worst of the bad news.

In summary, the markets are at an important juncture. The rally since November could be coming to an end. On the other end, this could be the final phase of a brief correction that successfully retests the November lows, which should usher a powerful rise. The indicators are mixed, but with a positive bias. For example, the Volatility Index was close to 80 on Oct. 10 and Nov. 21, now it is at 54. The rate that banks charge each other over government guaranteed rates peaked at 4.3% on Oct. 1, fell to 2.14% on Nov. 21 and is 1.03% now. While the financials were making new lows, many other sectors and most global equity markets are much higher than they were in November. See the charts below. Market action in coming days should present a clearer picture of future trends. I will continue to do my best to show you where the money is flowing during these historic times. (Markets usually fall on Inauguration Day.)

Bonds – US bond yields reached a low on Dec. 18 and have been trending higher. These yields fell when equities reached the lows in October and November. There is not the fear and flight to quality like there was during previous lows in the financials. Could this be the last gasp of the flight to quality trade?

Commodities – They say copper has a PhD in economics. Indicators show that copper prices are improving and that the trend for gold is still up. The outlook for oil is mixed.

Currencies - The indicators for the euro vs. USD and CAD$ vs. USD have turned negative issuing a sell.

The long-term oscillator for the US Banking Index, which represents US financial stocks, has turned down after only a brief rise from the previous oversold low. The dark green line above shows that the Banking Index continues to hit lower lows which is casting a shadow over all stocks in general. Equity markets cannot stay strong very long if the financials are weak. There has been such a severe sell off that a move to the upside for at least a few days is over due. The BKX is down 20% just today!

The Canadian TSX Index on the other hands is looking more positive. Canadian banks are in a much stronger position than the US banks but their share prices follow the trend of the US counterparts. The TSX and some other global markets are still much higher than the November lows compared to the US.

The short-term trend charts for the US markets turned negative a week ago and today the TSX finally followed suit. It is usually prudent to wait for three negative days because it can change intraday or with one or two up days which could happen anytime since there have been so many down days since Jan. 5.

Money is not flowing into government bonds like it has during other equity sell offs. The long-term oscillator has turned down indicating weakness for bonds. A sell signal for government bonds was issued Jan. 12, 2009.

Experts say that copper has a PhD in economics because it is used in so many products that it becomes a good barometer of economic activity. It is interesting to see that copper prices have improved since last December. The cost of transporting goods by ship (as determined by the Baltic Dry Freight Index) has risen 33% from a very depressed low reached on Dec. 5. These are some of the positive signs that were not occurring in October or November.

The long-term oscillator for gold is still in an uptrend but gold prices have reached lower highs since the collapse of Bear Stearns in March 2008.

The outlook for oil prices is mixed. The long-term oscillator seen here is rising which is positive. However, the short and long-term charts are negative. It could be forming a base here and retesting the December lows.

The euro vs. yen is a barometer of the willingness of global investors to assume risk. The long-term oscillator has turned down once again as the green line above shows the euro falling to the same lows reached in previous months. It would be positive if it can hold near these lows once again.

The long-term oscillator for the euro has also turned down after a strong rally peaked in late December. The US$ and the yen have reached highs when equities have reached lows. If the euro can hold near previous lows during coming days it will be positive. If they cannot, it will be negative. There has already been a sharp decline for many days so markets are due for at least a bounce. Market action this week is significant.

Volume 2, Issue 2

TUG OF WAR FOR EQUITIES CONTINUES AFTER A MAJOR ADVANCE. SELLING HAS DEMINISHED BUT BUYERS ARE HESITANT. SELL MEDIUM AND LONG TERM BONDS.

As of last week, North American equity markets had risen over 20% from the Nov. 21, 2008 lows. With the markets up strongly for many days in a row up to Tuesday, Jan. 6, some sort of short-term decline had to be expected. So far, the long-term oscillators are indicating that recent declines in equities, commodities, the euro and Canadian dollar in recent days, are short-term moves in a longer-term uptrend. However, that could change if equity markets do not improve by the end of the week.

Statistics indicate that the selling of equities has declined in a meaningful way since November. While buying has also increased, it has not increased as much as selling as declined. This is why the recovery since November has been rather tentative. Even though indicators of credit risk continue to improve (the TED Spread declined from 1.33% last week to 1.19% today which is in the normal range after reaching 4.33% on Oct. 10) US financial stocks are acting weak as you can see in the chart of the US Banking Index below. This all important sector, which is at the epicenter of the financial crisis, has to show signs of strength in order for the markets to continue to improve. The financials could well be in the process of forming a double bottom exactly seven weeks after the initial low. That would be very positive.

As mentioned last week, keep in mind that the level of investor fear and uncertainty is still slightly higher than it was at the worst of the selling after the Sept. 11, 2001 terrorist attacks and the bear market low in October 2002. This is derived from the Volatility Index, which closed at 46 today, compared with a closing high of 44 in 2001 and 45 in 2002. This is one of the reasons why buying has been cautious up to this point.

Even though most global market averages have risen enough to turn the short-term trend charts green or positive, (as you can see on the SP 500 and TSX chart) the US financial stocks have been weak and the indicator has stayed red. The financials could be making a double bottom, which would normally happen seven weeks after the initial low. Jan. 9 is seven weeks after the Nov. 21 low. A strong move to the upside would suggest that a double bottom had formed.

However, it is at precisely at these levels in the Volatility Index that major market advances and improvements have occurred at major turning points in the past. In addition, US equity markets have only been this undervalued two times in the last fifty years — 1974 and 1982. Both of those market lows occurred in the midst of severe recessions and were followed by major advances close to record highs within a year or so. In the past, markets have also performed well after selling had created enough cash to purchase 25% of the entire SP 500 Index. In November, there was enough cash to purchase almost 50% of the SP 500. While every economic and financial situation is different, some basic guidelines such as those mentioned above produce the same result, especially when confirmed by the indicators shown in this update. In summary, history suggests that the markets should have started a longer-term in November. Let us see if the markets and the indicators will confirm that in the days and weeks ahead.

Bonds – Prices for medium and long-term government bonds reached record highs two months after the indicators here issued a buy signal at the end of October. With US 10-year bonds yielding only 2.33% and US 30-year bonds paying only 3%, (the average yield for the US 30-year bond over the last 200 years is 5.33%) it only seems prudent to sell. The risk now seems far greater than the reward. See bond chart.

Commodities – Oil and gold prices declined sharply last week. The short-term trend indicator turned negative just after issuing a buy signal on Jan. 6. See oil chart. Indicators for gold are still positive.

Currencies – The correction in currencies has resulted in mixed signals. While the short-term trend charts have turned negative for the euro vs. yen and the US$, the long-term oscillators have not turned down yet. Action this week should produce a clearer picture by next Monday. CAD$ still positive vs. US$.

The long steep decline in the value of US financial stocks since the summer of 2007 eventually brought all markets lower. It could well be making a double bottom right now. If that is the case, it would be very positive, since that is when a strong advance usually begins.

In spite of the recent sell-off, the short-term trend indicator is still green for most global market averages.

As an example, the indicator for the Canadian TSX Index is still green too. This is important for commodity prices and the resource sectors.

The US SP 500 Index will have to rise to 950 to turn the long-term trend indicator positive. In my opinion, this one indicator is the best tool available to determine the market trend for the longer-term.

The TSX Index will have to rise above 9,700 to turn positive for the longer-term.

Even though equity markets have declined sharply in the last four sessions, the long-term oscillators for most global markets are still rising. It indicates, up to this point, that this is a correction in a longer-term uptrend.

The short-term indicator has turned negative for long government bonds. The long-term oscillator has also turned down after peaking. Since bond prices seem so overvalued and yields are so low, this is enough for me to issue a sell signal for medium and long-term bonds. It does not seem wise to lock in a return of only 2.4% to 3% for 10 to 30 years.

After turning green on Jan. 6 for the first time since July, the indicator quickly turned red again after oil prices dropped. The long-term oscillator is still positive. Hold position if purchased but wait for this to turn green again if it was not.

This relationship is an indicator of the willingness for global investors to assume risk. After being positive in December, it has turned negative once again after falling sharply. However, the long-term oscillators have not confirmed a change in any currency trend as of today.

The short-term trend indicator has turned negative for the euro vs. US$ but the long-term oscillator has not turned down yet.

The Canadian dollar is still positive to the US$. So far this bodes well for oil prices and commodity prices. Market action this week could have many ramifications.

Volume 2, Issue 1

MARKETS ARE RETURNING TO MORE "NORMAL" EXTREMES. THERE IS MORE IMPROVEMENT IN KEY SIGNPOSTS, ONE OF WHICH IS A BUY SIGNAL FOR OIL.

Many financial and economic statistics have reached historical extremes during the last four months. More recently, there have been improvements in some significant indicators such as the TED Spread and the Volatility Index. This is positive. However, it is important to realize that these indicators of credit risk and investor fear are just now returning to the extremes that they have reached during other major market lows. The TED Spread, which provides an indication of the interest rate that banks charge to lend to each other, reached a high of 4.33% on Oct. 10, 2008 when equity markets reached a major low. This was marginally higher than the peak of 4.02% reached on the day of the 1987 crash on Oct. 19. The TED Spread has now declined to 1.34%. While this is still higher than the average rate of 0.50%, the TED Spread has traded in the range of 1.3% for many years since 1984 when financial markets and the economy were strong. Equity markets rose for two years after the 1987 crash.

The Volatility Index, or VIX (which uses market statistics to measure investor fear) reached an all-time high on Oct. 19, 1987 when it hit 150. Keeping in mind that today’s measurements may not be a totally accurate comparison due to a change in the method of calculation, the VIX reached a peak of 98 on Oct. 24, 2008. To put this in perspective, the only time the VIX closed near the 45 level since 1987 was near equity market lows during:

• The Asian Currency Crisis in October 1997,
• The Clinton Impeachment/Russian Default Crisis in the fall of 1998,
• The week after Sept. 11, 2001 World Trade Center Attack, and
• The 2002 bear market lows in the summer of 2002.

The four arrows on the chart below mark these occasions. Equity markets have always had strong multi-month moves to the upside when the VIX has risen above 40. The level now is where markets have bottomed and risen during other severe declines since 1987.

While equity markets and the VIX have made significant headway sine October, on Dec. 29, 2008 the VIX still closed at a higher level than it did during major market bottoms at any time between 1987 and 2007. What this all suggests is two things. First, all of the government actions and the passage of time are working to restore the financial markets, which will eventually be reflected in the economy. Second, equity markets still have the potential for a very strong recovery from this point. As it is, North American equity markets are now up over 20% from the interlay lows. That means that this move qualifies as the beginning of a new bull market yet no one cares due to the lack of confidence. Don’t let your emotions, the media or what happened since August cloud your judgement. More and more indicators are turning positive since I stated that the base-building stage for the market ended and that the risk was close to zero in Nov. 25’s investment update. Another confirmation of progress today is a buy signal for oil. This is another positive signal for commodities, equity markets (especially Canada), resource currencies and global economic growth.

Bonds - Bond yields may have bottomed but no change in the indicators so far. Extreme optimism for bonds continues to concern me.

Commodities - Gold seems to be consolidating gains made. The short-term trend charts finally turn positive for oil, giving a buy signal. I stated that oil was peaking with the sell signal July 17 at $129.

Currencies - Buy signal for oil is positive for currencies of oil-producing countries like Canada.

The VIX has now declined long enough for the long-term trend indicator to turn red or negative. Equity markets rise as volatility declines. This is the very first of all long-term trend charts for equities to turn positive. The indicators for the VIX should be used together with the indicators for various market averages and sectors — another concrete example of improving developments.

The long-term oscillators for all the major North American market averages are continuing to move higher from deeply oversold levels and have a long way to go before reaching the initial over-bought levels of 0.8 on the right hand scale.

The short-term trend indicator has finally turned positive for the Canadian TSX Index. The short-term trend charts have turned positive for most global market averages and sectors except the financial sector. It would be positive to see the financial stocks really contribute.

The short-term trend indicator has turned positive for energy stocks too. The next level of strength (when additional capital should be added) occurs when the long-term trend charts turn positive for market averages and sectors.

North American bond prices took a big leap to record highs right after I issued buy signals near the end of October as the long-term oscillators turned up from the oversold level. It would be prudent to take some profits when this indicator turns red.

After being red or negative since July 17, the short-term trend indicator for oil has finally turned positive while the long-term oscillator has turned up in a convincing manner. This creates a buy signal. An investor can take a 60% of what would be a normal long position. A 100% long position could be taken when the long-tern trend indicator turns positive or the long position can be reduced when this turns red.

On Dec. 22, 2008, the long-term oscillator for the CAD$ vs. US$ rose from the oversold position and this indicator turned green or positive issuing a buy signal. The CAD$ has a high correlation to oil prices so the buy signal for oil is positive for the CAD$.

The long-term oscillator for the euro vs. US$ is still rising. So far, this suggests that the dip in the euro is just a short-term consolidation within a longer-term rise.

The action of the long-term oscillator for the euro vs. yen indicates that the euro is still in the early stages of an advance in spite of the recent consolidation. This is another significant barometer of the willingness to assume risk. Massive amounts of capital moved into the US dollar and the Japanese yen as equities were sold and leverage was reduced. The fact that the US$ and the yen are weakening is evidence that leverage is no longer being reduced and that there is a desire to institutional investors to purchase equities.

Volume I, Issue 53

IMPORTANT NOTICE: Bulls Zen Bears market analysis won’t stay a free service for long! Sometime in the New Year, this weekly service will become a paid service. If you’d like information on how to stay or get on the email list of this newsletter, please reply to or email communications@tradingpostfinancial.com.

EXAMPLE OF WHAT TO EXPECT FROM THE MEDIA AT A BEAR MARKET LOW DURING A RECESSION, WHEN THE RECOVERY STARTS, AND AT A RECOVERY HIGH. LONG TERM BUY SIGNAL FOR GOLD AND GOLD STOCKS.

Many investors wonder how the markets can improve when the economic news is so dreadful. The best way to address that concern is to look back at the last time stocks were this undervalued and the economy was in a severe recession — 1982. You can see articles from my library by Time magazine below. The first article was printed in the midst of the recession during the week of the stock market low on Aug. 16, 1982. The second article was printed when there were signs of an economic recovery on Feb. 28, 1983. The last article was written near the market peak, after the SP 500 Index was up 100% in one year after the bottom on Aug. 22, 1983. The arrows in the chart of the SP 500 Index below shows where the SP 500 Index was valued as articles were published.

These are some of the comments published right at the market low in August 1982:

• "I think we will see a repeat of the crash of 1929."
• "I believe we are in the early days of a depression."
• "The climate for business continues to deteriorate."
• "Nearly 500 enterprises now shut their doors every week, the heaviest corporate failure toll since the early ’30’s."

I think comments like that sound rather familiar, don’t they? If stock markets could not only rise, but rise 100% in one year when the economy was so bad in 1982, why can’t they rise now? Moreover, in 1982, government guaranteed investments were a very attractive alternative at 15% or more, now the alternative is closer to 3% when stock dividends can be double that. It was not prudent to allow all the optimism about higher oil prices to sway one’s thinking last summer. I do not believe it will be prudent now to let all the doom and gloom influence an investor that we are in a new era of economic doom.

The lesson we can learn from this exercise is that investors are not likely to get useful investment information by listening to the news. Yet many investors seem to believe that the more information and opinions they listen to, the wiser they will be. As an investment professional for almost thirty years, I can verify that consuming volumes of information was not helpful. After examining every option I could find, I have come to the conclusion that the indicators shown in these updates are the best tools for making prudent investment decisions. The reason that they are so much more helpful is because they show us where and how the money is actually moving, not where experts believe it should be moving. Remember, market look forward; the news and most analysts seem to look back, expecting current trends to continue. The long-term oscillators and the trend charts shown here show us when the trend is changing. An excellent recent example of this is the buy signals given by the oscillators for Canadian 10-Year Government Bonds in the Oct. 21, 2008 update and the buy signal given for US 30-Year Bonds on Oct. 27. While government bonds were stable during September and October, after the buy signals the Canadian Bonds are now up 8.8% and the US Bonds are up 19.9% in two months. Both bonds are now at all-time record highs. I believe these indicators will continue to be very helpful for determining the trend of stocks, bonds, commodities, and currencies in 2009. Happy New Year!

Bonds - Bonds are very overvalued and there is excessive optimism. Indicators are neutral.

Commodities - Long-term trend indicator issues a buy signal for gold and gold stocks. No indication of an up trend for oil or oil stocks yet.

Currencies - No change since last week, other than the long-term trend indicator could soon turn positive for euro vs. US$.

The long-term oscillator for US equity markets (and most global markets) are still rising, suggesting the trend is still up. The oscillator for the TSX is still mixed.

The long-term trend indicator for gold stocks is positive (green) for the first time since spring. The long-term oscillator and short-term trend indicator for gold and gold stocks turned up in November. All indicators are now positive for gold and GOLD.

This illustrates the huge rally for US bond prices to all-time highs right after I issued a buy signal at the low on Oct. 27, producing a gain of 19.1% in tw o months.

When this indicator for oil turns green for the first time since July at $129, it will issue a buy signal — the same for oil stocks. No need to spend hours studying what is happening with oil. Just watch this. How many experts got oil right at $130?

The euro has moved up sharply and could soon turn green for the long term for the first time since summer. This has been one of the best indicator for currency movements. Alan Greenspan has said that it is impossible to predict currency movements. I would disagree. What do you think?

Volume I, Issue 52

IMPORTANT NOTICE: Bulls Zen Bears market analysis won’t stay a free service for long! Sometime in the New Year, this weekly service will become a paid service. If you’d like information on how to stay or get on the email list of this newsletter, please reply to or email communications@tradingpostfinancial.com.

US FED LOWERS RATES TO ZERO AND ADOPTS A POLICY OF QUANTITATIVE EASING. EXPERTS WONDER IF IT WILL WORK. EXAMINE THE EVIDENCE BELOW TO FIND THE ANSWER — DON’T FIGHT THE FED. BUY SIGNAL FOR THE CANADIAN DOLLAR AND EURO.

The US Federal Reserve has pulled out all the stops to try to pull the economy out of a recessionary spiral by targeting a Fed Fund Rate as low as 0%. The Fed is also taking the additional step of purchasing all sorts of investments to lower mortgage rates and provide a bid for some distressed debt. As is always the case during uncertain times, the big question is, will it work?

People wondered the same thing during the late 1970’s as many global economies were in an inflationary spiral. Wage and price controls enacted by Nixon in the mid 1970’s had not worked. Neither did a brief spike in interest rates from 10% to 15% in early 1980. Therefore, in 1981, Fed Chairman Paul Volker took the bull by the horns and pushed interest rates close to 20% and held them there. That action was successful in breaking the back of the inflation. However, by mid 1982, the high interest rates had caused massive losses, 500 corporate US bankruptcies a week, 12% unemployment rates, a severe recession and a bear market for stocks. By August 1982, the Fed had been lowering interest rates for months with few visible signs of improvement other than the bond market. Again, people wondered, how on earth will the economy ever recover from this shock. Four months later, in November 1982, US equity markets were at record highs and there were numerous signs of a powerful economic recovery. (Volker is now one of Obama’s advisors.)

In 1987, the Fed raised interest rates aggressively until the stock market crash in October. People (not just investors) were wondering if this crash would cause a depression just like the 1929 crash did. The Fed lowered interest rates sharply the day after the crash. Would it work? The bond market soared, and by late 1987, equity markets and the economy were improving. The September 2001 terrorist attacks and the longest bear market since the 1930’s (in October 2002) had many doubting whether anything would ever be able to turn the economy and stock markets around. Of course it did.

Evidence exhibit #1 – The relationship of the euro to the Japanese yen is a barometer of the carry trade. It is perhaps the best indication of the unwinding of leverage by hedge funds and the willingness of global money managers to assume risk. You can see that the euro has formed the normal seven week base-building period from late October to early December and has now moved to a higher high. The indicator has now turned green (positive) for the first time since the end of July. This is a clear positive signal.

In the early 1930’s, interest rates and taxes were increased. The US government waited for years before investing capital in 6,000 banks. These are some of the reasons why a depression developed then. Since every economic challenge is different, there is often doubt whether the action of the Fed can slow down a roaring economy or revive an ailing one. However, history shows that appropriate action by US Federal Reserve officials has always been successful in the past. That’s how the saying "Don’t find the Fed" came about. The gloom and uncertainty by the consensus of experts (which is so common at market lows) do not alter the facts of history. There is no reason why steps taken this fall will be successful either. Please examine the indicators shown here to observe the impact that the actions have had so far.

Bonds - Government bond prices have skyrocketed to record highs since the long-term oscillators gave a buy signal for bonds as reported in late October. In 1982 and 1987, bond prices lead stock prices higher as they usually do. Bonds are a hold. The Fed is buying them and creating a bond bubble. Don’t stand in the way.

Commodities - Indicators for gold and gold stocks have been positive for a long time. Indicators for oil, other commodities, and their respective securities are still in the process of bottoming.

Currencies - The long-term oscillators and the short-term trend indicators have turned positive for the euro vs. yen, euro vs. US$, and the CAD$ vs. the US$ resulting in buy signals.

Exhibit #2 – The difference in yield between corporate bonds and government bonds moved to highs of 4.3% on Oct. 10. The rate declined below 1.5% in the last two weeks, which is in the middle of the trading range since August 2007. This is positive.

Exhibit #3 – The Volatility Index (VIX) measures investor fear by comparing the volume of trading on shares that are rising with the volume of trading on shares that are declining. After making a double top at 80, the Index has now dipped to 42.81, the lowest level since early October. The long-term oscillator for the VIX turned positive for equities in late November and the short-term indicator has been red (positive for equities) ever since.

Exhibit #4 – The short-term trend indicator has turned positive for the SP 500 for the first-time since August after the long-term oscillator turned positive in late November. While it is positive for the SP 500 and some other market averages, it is not yet green (positive) for every market average. When that happens, it will be a confirming buy signal for equities.

Exhibit #5 – All indicators turned positive for Canadian and US government bonds after a buy signal was issued in these updates during late October. Bond prices usually lead stock prices higher since lower yields (now close to only 2% for 10 years in the US!) make stocks more attractive and competitive.

The long-term oscillators for North American and most global equity markets are moving higher, suggesting that the trend is up. It is still very low and has a long way to go before reaching the overbought level above 0.8 on the left hand scale.

The long-term oscillator for the Canadian TSX is also moving higher but lower oil prices are holding it back a little. US equity markets just about always lead all other global markets. As long as US equities are moving higher, most every other market will follow along.

The indicators for gold and gold stocks were the first commodity and resource sector to turn positive. Gold is now positive enough that it can turn this long-term trend chart green (positive). The US$ may have peaked, which is positive for gold.

Oil prices have declined like an elevator shaft since a sell signal was issued at $129 on July 17. None of the indicators have turned positive yet even though oil is down to $40 per barrel. As you can see, this has been a very accurate indicator in a very volatile commodity.

The long-term oscillator has turned up for the CAD$ vs US$ and the short-term trend indicator has turned positive issuing a buy signal. A bottom in oil prices would be helpful for the CAD$.

The long-term oscillator has turned positive for the euro vs. yen. This, together with exhibit #1 turning positive on issues a buy signal.

The euro has been strong as the US dollar has declined from its overvalued state. This move has been so powerful that this long-term trend chart can turn green soon. You can see how accurate this indicator has been in the past. If a currency trader spent only a few minutes a week and looked at nothing other than this to go long or short, the results would have been fabulous.