Indicators Mixed with Positive Bias

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.