What Canada Has that the US Does Not

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.