Bulls Zen Bears

WHIRLWIND OF VOLATILITY SEEMS TO OBLITERATE TRENDS WHILE OIL SKYROCKETS AND US FINANCIALS BREAK PREVIOUS LOWS. WHILE HIGH OIL PRICES ARE A SERIOUS THREAT TO EQUITIES, MOST OTHER DATA SUGGESTS THIS IS MERELY A PERIOD OF CONSOLIDATION BEFORE A VERY STRONG RISE.

Oil and gold fall as the Bernanke speaks and the US$ rises. Then Trichet from the European Central Bank (ECB) speaks and they move sharply in the other direction. The DJIA rises 214 points on Thursdaly and falls 394 points on Friday as the biggest jump in unemployment in 20 years cause investors to fret and send the battered US financials to yet another new low. Why not throw in the biggest rise in ever in oil for one day to make matters even worse? What on earth does it mean for investors?

Very simply, I believe it means that many assets are consolidating after moves since the mid-March lows in US equities. Since Mar. 17, 2008 the SP 500 rose 13%, the TSX rose 20%, gold fell more than 10%, commodities from copper to rice peaked, and oil rose 35%. Almost nothing goes straight up or down, so it is very normal for trends to reverse course or consolidate recent moves. Random volatility during a consolidating phase is not unusual. Typically, consolidations/corrections like this last six to seven weeks. Since US equities peaked on May 19, we could continue to see up and down action until the end of June.

The huge rise in the price of oil is a real concern for investors. In Stephen Leeb’s book, The Oil Factor (2004), he shows that equity markets decline if the price of oil rises more than 80% in one year. This means that stock markets and the economy could be hurt if the price of oil remains above #121 in June and $135 in July. He states that equities improve when the increase is reduced to only 20% for a year. A 20% increase from last year’s levels would be approximately $81 for June and $90 for July. Even though it seems like oil is destined to rise to $150 according to the media, nothing can be ruled out at this stage of market activity.

Offsetting the concerns about energy prices is the pessimistic sentiment created by all the bad news. While such negative unemployment figures seem ominous, past history shows that US equities just about always perform extremely well after such a negative move – a gain of 30% in 12 months for the DJIA on average since 1950 according to JP Morgan. A healthy level of pessimism, very low consumer confidence and statistics showing that the markets are as oversold as they were before strong rises (such as October 2005 and July 2006), indicates that the risk is likely much lower than it might seem, and that the upside potential when this period is over, could be much better than it might seem. Hang on for the ride! I will continue to do my best to try to make sense of what seems unexplainable in the weeks ahead.

Bonds – Bond prices have also been volatile. The long-term oscillator and bond prices appear to be making a double bottom.

Commodities – The short-term oscillators for gold and oil turned up last week. The long-term oscillator for gold is positive and indicating topping action for oil (as it has for weeks now). The indicators are the same for the respective gold and energy equities too.

Currencies - According to the long-term oscillators, the CAD$ seems to have peaked versus the USD$, the USD$ seems to be strong compared to the euro and the euro is stronger than the yen.

Catch the trend.

The short-term oscillators for the US markets are oversold and are forming a double bottom like they did at market lows in August and November 2007 and January and March of this year.

The long-term oscillators for US equities are still declining from overbought levels. These need to turn up to indicate that the corrective phase is over. They do not normally drop to oversold levels so soon after a market low.

The long-term trend chart for the SP 500 has turned red or negative once again, while the TSX is still very green. Stay in Canada.

The short-term oscillator for the Volatility Index is showing a double top like it did when the markets bottomed in August and November 2007 and January and March of this year. You can see that this is happening with the Index at much lower levels (25 on the right scale) now compared to other peaks (35).

The long-term oscillator for the Volatility Index is rising and needs to turn down to suggest that this corrective phase is over.

The short-term oscillator for the TSX turned up last week along with the oscillators for gold, gold stocks, oil and oil stocks suggesting that they should rise for a week or so. The TSX cannot rise very long if the US markets are declining.

The long-term oscillator for the TSX is a little lower with the TSX higher. This looks similar to the indicator for oil. If oil falls, the TSX could decline until the US markets turn around. Continue to stay with Canadian investments as has been recommended to my clients since May 2002. If oil prices rise, the TSX usually benefits. If they fall and the US markets rise, the TSX will usually benefit too.

The long-term oscillator for bonds is likely creating a double bottom, which is fairly rare. Usually these oscillators create deep V bottoms as you can see. Nonetheless, bond prices have not been very volatile since this first turned up May 19. (Ten year US bond yields are 3.99% now versus 3.84% on May 19.)

The short-term oscillator for oil turned up last week at $125 per barrel forecasting this recent rise. The short-term indicators are usually accurate for at least three to five days or so.

Similar to the TSX, the long-term oscillator for oil reached a lower high when the oil price moved to a higher high. This is usually a sign of weakness.

The change in the currency oscillators this week is that it seems like the CAD$ peaked compared to the US$. It would not be unusual for the CAD$ to stay in a trading range for a year or so since it had a rise of historical proportions against the US$ 2007.

Data supplied by

EQUITIES CONTINUE TO CONSOLIDATE RECENT GAINS. US FINANCIALS RETEST LOWS ANOTHER TIME, RESULTING IN A SHARP DROP IN OPTIMISM WHILE OIL AND COMMODITY PRICES RETREAT. IT SEEMS LIKE EVERYTHING IS IN A STATE OF TRANSITION. WHAT WILL THE NEXT MAJOR MOVE BE?

After today’s close, the SP 500 is down 2.8% after peaking on May 19, while the TSX is down 1.5% after reaching an all-time high on May 20. Soon after prices of commodities like rice and copper peaked, oil prices followed by reaching an all-time high on May 22. Similar to the Goldilocks story, oil prices were too hot, equities were just right, and US financials were too cold. So what happens next? Does oil and gold spike while equities resume a bear market, or does oil fall, enable equities to rise? Or does everything just stabilize for awhile?

While there have been some bid daily declines for equities, the figures above show that prices have been holding up quite well. According to Investors Intelligence, the recent volatility resulted in the number of bulls falling from 47% to 38% this week, bringing the spread between the bulls and the bears to only 5.7% from 16.5% the week before. Anything below 15% is positive. The US Banking Index appears to be testing its low for the fourth time, creating very oversold conditions for US equity markets. The long-term trend charts for equities are still positive. Putting this all together, it seems as though the risk for equities is low. So far it seems as though this is just an orderly pause after a sharp rise from the March lows for the TSX, and a gradual up trend for US equities.

As the bear markets ended in March 2003, the SP 500 bottomed on Mar. 14 and peaked in June 18. Then US stocks consolidated its gains for only two weeks before continuing the up trend. This year the SP 500 bottomed on Mar. 17 too. While conditions seem to be ripe for a powerful advance after this consolidation phase is over, the US financials need to show some strength to enable this to occur. While the US financials are weak, the long term trend indicator for the Canadian financials have turned positive for the first time since last fall. This is another sign that the next major move for equities should be up, instead of down.

It is always interesting review comments from the past in the Update for June 4, 2007, before there was any hint of sub-prime problems, I listed the positives and negatives for equities with the following conclusion, "We are likely closer to a market decline than a new bull market. The decline could be serious. This is probably a time to be aware and alert, not complacent!" It is important to recognize periods of high risk before problems occur, not after.

Bonds - Bond yields continue to rise after the long-term oscillator issued a buy signal for bonds. However, the signal still stands.

Commodities – The long term oscillators are positive for gold and silver, and cautionary for equities and oil. The hype and media attention that oil received as it reached record high pales with the attention the TSX received when it closed over 15,000. That is why the risk could be greater for oil then equities.

Currencies - Indicators suggest that the CAD$ is stronger than the US$, but that the US$ is stronger than the euro. The euro seems to be stronger than the yen.

Catch the trend.

US equities are relieving their overbought condition. When the oscillators reach the high, overbought level and decline, it suggests a pause or a decline. As you can see the the past, markets often continue to rise when this occurs shortly after a market low.

The long-term trend indicators for the US markets are still green, suggesting that, so far, this is just a normal pause.

The long-tern oscillator for the TSX is also declining from the overbought level, suggesting that this is a pause in the up trend.

The long-term trend chart is still very positive for the TSX. The TSX had a steep advance and was due for a rest. It would have to decline sharply to turn red.

The long-term trend chart for the Volatility Index turned red (or positive in the case of the VIX Index) two months ago. It still indicates that the risk is less now than it was for most of 2007 and early 2008.

The long-term oscillator for the US Financial Services Index is making higher highs as these stocks retest their lows. This suggests that the lows will hold. When this turns up again, it will indicate that the financials are ready to start another up trend.

While the US Financial Indexes are not close to turning green, the long-term trend indicator for the TSX Financial Index has turned positive by turning green for the first time since last fall. Look back to 2003 and see how accurate this was in determining the long-term trends.

The long-term oscillators for bonds bottomed and turned up, giving a buy signal on May 20. Bond prices have not risen yet. Sometimes there is a double bottom. It suggests that prices will be higher (and yields lower) three to six months from now.

On May 19, 2008, the long-term oscillators for gold and silver turned up from oversold levels for the first time since last summer. It still indicates that these precious metals should be starting a new up trend even though prices are volatile. The up trend took a while to get going last year too!

The long-term oscillator for oil indicates that the price should continue to consolidate or decline until this oscillator turns up again.

This suggests that the CAD$ is still in an up trend versus the US$.

Until this long-term oscillator peaks and turns down, the odds are that the US$ will be stronger than the euro.

Data supplied by

EQUITIES COULD CORRECT FOR ANOTHER WEEK OR SO, BUT US STOCKS ARE ALREADY AS OVERSOLD NOW AS THEY WERE IN MID-MARCH. US MARKETS ARE ALSO FOLLOWING THE SAME PATH AS THEY DID IN 1991. THIS COULD IMPLY ANOTHER 2.5% DECLINE THIS WEEK FOLLOWED BY AN 18% RISE IN THE FOLLOWING MONTH. THE OVERSOLD CONDITION OF THE MARKETS MAKES THIS FEASIBLE.

US markets gave up all of the gains made the previous week by falling 2.7% last week while the TSX declined 1.7% after closing above 15,000 for the first time last Tuesday. Oil and the TSX are due for a pause. However, even though the SP 500 is up 10% from the Mar. 17 lows, there is data which indicates that the US markets are now as oversold as they were at the market lows in the middle of March, right after Bear Stearns collapsed. For many weeks, Hays Research has been pointing out that the US market averages have been following exactly the same path as they did after the Savings and Loan Crisis correction in 1990. If this pattern was to continue, the markets would decline another 2.5% this week (after Jan. 2, 1991 the markets correct 5% in two weeks) and then rise 18% in the following month. Since the markets are already so oversold, another week of declines could realistically produce the conditions similar to the fall of 2005, the summer of 2006, and January 1991 which were followed by long, powerful advances. In January 1991 it was the US attack against Iraq that sparked the spike to higher levels. Technical and statistical data does not give an idea of what may cause a major rise, they just point out that market conditions could be developing that typically result in positive market action. Time will tell.

Many sectors have risen nicely off of the lows reached earlier this year. Now the financials need to do their part by showing some strength and doing some "heavy lifting." There are many signs that the worst of the financial crisis is over. The financials need to act in a way that confirms this. The next few weeks could be very interesting.

Bonds - The long-term oscillators for bonds turned up last week and issued a buy signal. This means that yields should decline while prices rise.

Commodities - Oil’s relentless climb is forcing out short sellers. Conditions in oil and natural gas markets are just the opposite of the conditions in the US equity markets. A decline in oil prices would likely be very positive for equities at this point because the valuations of many oil stocks are based on $90 oil. The fact that oil stocks fell last week as oil continued to make record highs, shows that investors do not think that oil will stay in this price range. The oscillators issued a buy signal on gold and gold stocks last week. This week a buy signal for silver was confirmed. After a year long correction, uranium stocks have been acting much better even though the price of uranium continues to trade at the recent low of $60. It is usually safer and more profitable to find areas to invest in that have been depressed for a while and then improve, than sectors that are making news headlines with record highs.

Currencies - The CAD$ still looks stronger than the US$. The US$ showed some strength against the euro two weeks ago, but it maybe just another "dead cat bounce." The euro seems to be stabilizing versus the yen.

Catch the trend.

The long-term oscillator for the Volatility Index turned up from a very oversold position implying that risk has increased. Corrections occurring early in a new long-term up trend are usually minor. What happens in the next few weeks could clarify for the masses if this is a new bull market or bear market rally.

The short-term oscillator for the Volatility Index is already more than half way to the overbought range so it could be there by next week. It would be very positive if the VIX can stay well below the high levels reached in August 2007, January and March.

The long-term oscillators for most markets have now peaked after a two-month rise. However, the oscillators should be used primarily for buying, not selling. They can, however, at least indicate that a pause is due.

The long-term oscillator for the TSX has also peaked. As you can see, the markets have often continued to rise when this has happened before. This is why they should not be used for selling. It usually indicates a pause in the up trend.

Bonds appear oversold and ready to rise in price even though inflation concerns are mounting. It turned up issuing a buy signal last week.

The long-term oscillator for gold and gold stocks turned up last week issuing a buy signal.

The long-term trend chart for gold stayed green during this correction, confirming that this was merely a normal correction in a longer-term up trend.

Last week the oscillator for silver had bottomed, but not turned up yet. This week it followed the action of the gold oscillator by turning up. This indicates that the worst-case scenario has been factored into current prices. Sometimes there can be a double bottom.

The long-term oscillator for oil has peaked but oil keeps on gaining without a pause so far. It is much more difficult to know when to sell than when to buy.

The oscillator suggests that the CAD$ should move higher relative to the US$.

The US$ has had another half-hearted rally versus the euro. It may be coming to an end unless there is more upside this week.

The euro seems to be staying in its trading range with the yen.

Data supplied by

TECHNICAL INDICATORS INCLUDED IN THE WEEKLY UPDATES HAVE ACTED LIKE A ROAD MAP, GUIDING INVESTORS TO TAKE ADVANTAGE OF THE PATH TO ALL-TIME RECORD HIGHS IN THE S&P/TSX.

In spite of all the market volatility and negative news that bombards us everyday, the markets have again climbed the proverbial wall of worry. While the SP 500 is up over 11% since the Mar. 17 low, the TSX has risen 22% from the Jan. 22 low by reaching all-time record highs of 14,666 today. While many are perplexed about how this could happen in such an uncertain environment, the indicators and comments included in the weekly updates have been providing a rationale for this strength throughout the rally. It is another example of why it is so much better to rely on technical indicators that tell you where the money is flowing, rather than on news, opinions, and statistics which explain what has happened in the past. It is like a tourist entering an unfamiliar city. The tourist can either look in the rear view mirror, or at a map. While a map does not predict the future, it shows us where we are and where we are heading. It is the same with technical tools illustrated in these updates. They don’t tell us where the markets will be three or six months in the future, but they at least tell us where we are in the cycle, and what the trend is likely to be. Once again, they provided a clear signal that the worst-case scenario was factored into current prices some time ago. Since most people that wanted to sell had already sold, this meant that the only way the markets could go was up.

While the dismal performance of the US financials has hurt the performance of the US market averages, the TSX has continued to outperform global equity markets. These updates have been recommending to invest primarily in Canada.

While a short-term pause or consolidation could occur at any time, there seem to be few signs of any longer term trouble for the time being. However, the resources could pause while the financials catch up.

Bonds – Bond prices are still weak according to the long-term oscillators.

Commodities – Gold and silver prices look they are building a base since the oscillators have not turned up yet. The Feb. 11, 2008 Oil chart showed that oil had likely bottomed at $93.38. The Feb. 18, 2008 Oil chart showed that the long-term oscillator had turned up (at $96.21) and that oil likely started a new up trend. Now, almost three months later, the price of oil has been making headlines for weeks as it rises relentlessly over $120. However, as the price rises, so does the risk. While the up trend is due for a pause, it is difficult to know when or if that will happen. It is usually prudent to look for lower risk opportunities at a time like this rather than stick with an up trend too long. As copper prices had the biggest rise in history last Monday, the oscillators suggested that it was a blow-off instead of a new rise. Accordingly, copper prices drifted lower after that.

Currencies – Trends indicate that the CAD$ should strengthen compared to the US$. After a long rise, the euro should continue to correct versus the US$ and the yen.

The trend chart turned positive for the TSX on Apr. 7, more than a month before the TSX closed at a new all-time high today.

The SP 500 Index was one of the last indexes in North America to turn positive because of the large weighting in the financial sector. This shows that Canada is the stronger and better place to invest in.

The US Financial Services Index and Banking Index trend charts have been red ever since last summer when the sub-prime problems began to surface. It would be positive if they finally turned green too.

The long-term oscillators for the financial stocks still has some distance to go before reaching the overbought level. Further strength here would help the US markets, which could offset weakness in the resource sectors if that happens.

Bond prices still appear to be weak.

The long-term oscillators for gold and silver are very low, suggesting that much of the risk has dissipated. However, they need to turn up to indicate that an up trend has started. Since they have not turned up yet, it seems that a period of base-building has started.

The long-term oscillator for oil is very high. This is usually when a pause in the up trend occurs in the near future.

The long-term oscillator for copper is in a down trend, suggesting that prices should correct in spite of a record setting rise occurred last Monday.

The oscillator for the CAD$ has turned up again indicating that it should gain against the US$.

On the other hand, the euro looks like it is still correcting against the US$ and the yen.

The euro looks weak compared to the yen.

The euro would have to decline more against the US$ for this trend chart to turn red or negative.

Data supplied by

ALL INDICATORS ARE NOW POSITIVE, GIVING THE "ALL CLEAR" SIGNAL FOR EQUITIES. ACTION IN BONDS, INSIDER BUYING AND ADVISORY SENTIMENT SIGNAL THAT THE BEAR IS DEAD.

COPPER AND OIL ARE SHOWING SIGNS OF TOPPING WHILE GOLD AND SILVER APPROACH A LOW.

Is this rally in a bear market or the beginning of a new bull market rise? The opinions relating to this question have been occupying the media and minds of investors for over a month now. A successful investor needs a discipline to follow to make prudent, profitable decisions. Waiting for the consensus of investment experts and the media to change their outlook will be too late. After all the research I have conducted during my 25 year career, I believe that the long term oscillators and trend indicators (which turn red and green) provide investors with the best tools for making buying and selling decisions. Today the trend indicator for the S&P 500 and the NASDAQ turned green or positive. This follows the action of the DJIA, DJU, and US government bonds, which turned positive on Apr. 7. When all these trend indicators turn positive, a buy signal is issued for equities. I believe that investors turn negative in the future, it will signal that the rally could be over. The past record has shown that it is better to do this than to wait on the sidelines and take the risk of missing out on the dynamic rising stage of a new bull market.

While investors where frightened as the SP 500 dropped to the bear market low of 1,257 on Mar. 17, the update issued the same day was encouraging, showing that the advisory sentiment has reached the same levels as the bear market low in 2002. Since 2000, the shortest rally after this extreme was four months. That would imply that this rally could have at least another two months to go. After January, insider buying also increased to levels typically seen near bear market lows. The week ending Apr. 25 saw the most investment grade bond issuance on record as the spread between credit default swaps and investment grade bonds have fallen by 50%. The technical evidence very clearly indicates that the worst-case scenario for equities has been factored into current prices, which has put an end to the bear market.

Bonds – Government bond prices are in a downtrend as the flight to quality trade reverses and funds move back into equities and corporate paper. This confirms that the appetite for risk is getting closer to normal.

Commodities - These updates have been suggesting that gold prices have been at risk of a decline since Mar. 10, 2008 just before it reached $1,000 an ounce for the first time ever. The price of gold closed at $853 on Friday. Gold and silver have been correcting for seven weeks now along with gold and silver equities and they are now oversold. Copper spiked to new highs today but the action of the oscillators looks very much like they did for gold just before it peaked in March. Last week’s update stated that oil had the potential to pause or correct in coming weeks. That is exactly what happened last week.

Currencies – The CAD$ is in limbo versus the USD$. The euro is declining compared to the USD$ and could be peaking against the yen.

Catch the trend.

You can see the small green dot on the far right indicating that the SP 500 has turned positive. To avoid being whipsawed I use many indicators together before issuing a buy signal, not just one or two.

Although it is difficult to see the green dot on this NASDAQ chart, you can see that is not red. In the past, the up trends have all lasted a long time, expect for 2004.

This advisory sentiment chart from Apr. 22 reprinted with permission from Investors Intelligence shows that optimism is increasing after reaching low levels reached during the long term capital crisis in 1998, after Sept. 11, 2001 and the bear market low in October 2002. The shortest rally after reaching an extreme low like this was four months after Sept. 11, 2001.

Government bond prices are still in a downtrend as the appetite for risk increases.

Gold and silver have reached the fully oversold levels but have not turned up yet. This indicates that the worst case scenario is being factored in. It could turn up anytime now. This could happen at higher prices.

Silver prices have also declined along with gold to oversold levels. They should continue to move together.

Gold stocks are also very oversold after correcting since mid-March.

Copper had a spike to record highs today. However, while copper has been reaching higher levels, the oscillator has been hitting lower highs. This is the same situation that happened with gold in March just before it peaked over $1,000. This could be a blow-off for copper, not the beginning of a new rise.

Oil looks to be extended and due for a pause.

The CAD$ is in limbo compared to the US$ at this moment.

The long-term oscillator indicates that the euro is still weakening compared to the USD$.

After being in a long trading range, the euro looks like it could reach another one of it’s highs compared to the Japanese yen.

Data supplied by

LONG TERM TREND INDICATORS FOR THE DOW JONES INDUSTRIAL AVERAGE AND DOW JONES UTILITIES INDEX TURN POSITIVE, WHILE LONG US BONDS TURN NEGATIVE FOR THE FIRST TIME SINCE JULY 2007. THIS IS POWERFUL EVIDENCE THAT THE OUTLOOK FOR EQUITITES IS CONTINUING TO IMPROVE AS RISK ABATES.

After rising 1,461 points or 11.8% during four consecutive weeks, the S&P/TSX gave up 133 points last week. However, it is still the only major global market average with a gain (even if it is only 2%) for 2008. The loss for the TSX and some commodities last week was the US market’s gain, as the DJIA and DJU Index long-term trend indicators finally joined the DJT, TSX and Volatility Index by turning positive.

Looking back, bond prices fell sharply (yields increased) in the Spring of 2007 as investors expected strong economic growth to increase inflation. This was before the subprime problems surfaced. Bill Gross of PIMCO, the largest bond manager in the world shorted long bonds, expecting that inflation and yields would continue to trend higher. Surprisingly, the long-term oscillators for US and Canadian bonds issued a buy signal on June 18, 2007 as recorded in my update of that week. The signal proved to be very accurate as the subprime problems became more and more visible. This radically altered the outlook to a slowing economy and a flight away from corporate debt to the safety of government guaranteed bonds. The result was that bond prices rose sharply from June 15, 2007 until January 25, 2008. Since the long-term trend indicator for 30-Year US Government Bonds have now turned negative for the first time since last summer, it is another clear signal that the outlook for economy, equities, and the appetite to assume risk improved more than any other time since the current financial crisis began 10 months ago. Unfortunately, PIMCO produced very poor results for bond investors in 2007.

If you examine the charts below for yourself, you can see that when they all turn positive together, they are very reliable indicators. While no indicator is perfect, they are the best tools I have discovered to provide a discipline for making important investment decisions. Ignore them at your peril.

For a month I have been stating that the charts for gold and silver have been indicating that they are in a longer-term down trend in spite of brief rallies to the upside. It was interesting that Dennis Gartman of The Gartman Letter (perhpas the most popular investment newsletter right now) surprised his followers by selling all his gold positions last Monday, Apr. 21. While you and I may never have the ability to play hockey against Sidney Crosby, gold against Tiger Woods, or basketball against Steve Nash, the past record shows that together, we can compete against some of the biggest names in the investment world and end up performing quite well.

Bonds – Sell signal issued for government bonds. As mentioned numerous times, bonds usually perform poorly at this stage of the stock market/interest rate cycle. The long-term trend indicators have turned negative for bonds which suggest that bond prices are now in a down trend.

Commodities – Gold and silver have been correcting since mid-March. The oscillators are getting close to the fully oversold level but have not turned up yet. The long-term oscillator for oil is extended on the upside.

Currencies – The long-term oscillators suggest that the CAD$ should gain against the USD$ and euro. The USD$ should also gain compared to the euro and that the euro is still strong versus the yen.

Catch the trend.

If you look closely on the far right you can see one green dot, which shows that the indicator has turned positive for the DJIA for the first time since last fall. You can see that this has proved to be a good buying point every time except for mid-2004 when it was too early. Using this together with the indicators for other market averages helps to reduce those imperfect signals.

The long-term trend indicator for the DJ Utilities Index also just turned positive.

The indicator for the DJ Transports Index turned positive weeks ago along with the TSX.

The indicator for the Volatility Index also turned positive for equities weeks ago, confirming that the character of the market had changed for the better for the first time in a year.

The long-term trend for US long government bonds turned red, issuing a sell signal after being positive since the summer of 2007. A buy signal was issued on June 18, 2007 when the yield on a 10-year GOC bonds was 4.65% (3.73% today) and the yield on 10 US bonds was 5.15% (3.83% today). This suggests that the flight to quality trade that raised bond prices into over-valued territory is unwinding.

Last week the short-term oscillator was turning down from a peak so the comment stated that there could be further declines or a consolidation in the period ahead. Gold fell from $919.50 on Monday to close at $891.50 on Friday. The Silver Trust also fell from $176.71 to $166.85. See the next chart.

The long-term oscillators for gold and silver are still declining but are in the fully oversold area. They need to turn up to suggest that the corrective phase is over. The gold oscillator last turned up and issued a buy signal on July 9, 2007 at $663 per ounce. That was around the same time that the well-respected Eric Sprott bought gold according to a recent report by the Globe and Mail.

The long-term trend chart for gold is still positive suggesting that this is a pause in a long-term up trend move that, so far, still seems to be intact. The indicator turned green last summer and has stayed that way.

The same holds true for silver. Again, you can see how accurate this indicator has been in providing selling and buying points. The last buy signal occurred around $130 last fall.

In the past, the price of oil declined within weeks after the long-term oscillator had risen above the 0.9 over-bought level on the left hand scale. The oscillator turned up on Feb. 11, 2008 at $93.38 per barrel. It is now up $25.62 or 27.4% in 11 weeks since Feb. 11.

It looks like the CAD$ could rise compared to the US$. It would be more convincing if it was fully over-sold though.

The oscillator for the Japanese yen is still in a down trend compared to the euro.

Data supplied by

THE TECHNICAL INDICATORS HAVE BEEN MUCH MORE HELPFUL THAN LISTENING TO THE NEWS OR THE CONSENSUS OF INVESTMENT EXPERTS.

There has been no shortage of negative news, earnings shortfalls, and dire predictions during 2008. Yet the markets have made meaningful headway since the US markets bottomed on Mar. 17 and the S&P/TSX bottomed on Jan. 22. When facing a dilemma, following the consensus of experts such as medical specialists, engineers or mechanics is usually the best course of action to take. However, when it comes to investments, over and over again the consensus of experts is often dead wrong. Most analysts tend to be optimistic at market tops and pessimistic at market lows. It is no different this time either. As of last week there were still slightly more bears than bulls in the Advisory Sentiment survey, yet the SP 500 is up 113 points or 10.6% and the TSX is up 2,226 points or 18.5% and only 410 or 2.9% away from an all-time record high. Over a quarter century of experience as a professional in the investment industry has taught me that the best way to determine market prospects and make prudent, profitable decisions, is to follow reliable technical indicators, not news reports or the consensus of investment experts. In all my years of examining market indicators, I have found the oscillators and trend charts used in my updates to be the best in the world – bar none. That is why I produce them for you here.

The sharp market sell-off on Friday, Apr. 11 when GE missed its earnings forecast turned out to be a temporary "storm cloud" as forecasted in last week’s update. While North America markets rose more than 4% last week, the long-term trend indicators for the US market averages have still not turned green, but are close to doing so. When that occurs, it will give the "all-clear" signal. The trend indicators for the Volatility Index and the TSX turned positive two weeks ago.

The indicators have also been very helpful for analyzing gold and silver. As the price of gold approached $1,000 an ounce on Mar. 10, the oscillators were suggesting that the risks of a decline for precious metals had increased just as gold was making front-page news. Gold promptly fell 10% right after closing above the $1,000 record high mark. While gold and silver seemed to be making a comeback with some major gains after correcting, the indicators were showing that this was just a short-term rise in a longer-term downtrend. Late last week the price of gold and silver fell as equity markets held on to solid gains. Please see the gold charts and comments below for the latest update.

In summary, the action of bonds, precious metals, and equities suggests that investor confidence and the appetite for risk have increased. All that needs to happen now is for the red and green trend charts to turn green (positive) for all the US market averages. The markets need to stay very close to current levels for a little longer, or rise a little more for this to happen. I will keep you posted.

Bonds – Bond prices fell (yields increased) as confidence in an economic recovery improved. Bonds are usually a poor investment at this stage of an economic slowdown.

Commodities – gold and silver seem to be in the final short-term declining stage. The charts for oil still look positive.

Currencies – the long-term oscillator for the CAD$ has bottomed and turned up, suggesting that the Loonie should now rise compared to the US$. The euro looks strong versus the USD$ and yen as the long-term oscillators are still rising. I will display euro charts again next week.

After a brief consolidation phase, the short-term oscillators for the market averages turned up last week suggesting that the markets should have another two-week spurt to the upside.

Last week the short-term oscillator for the US Financial Services Index and US Banking Index turned up from the oversold position. This is very significant, as this is where the problems are and the financials comprise the biggest sector in the SP 500 Index.

The long-term oscillators for the US market averages have not been this strong since the rise after the Aug. 16,  2007 low. This suggests that this rise is different than the rallies experienced since November 2007.

The fact that the long-term trend indicator for the Volatility Index has turned red (when the Volatility Index turns red it is positive for equities since volatility peaks at market lows) is giving a clear signal that the character of the market has changed for the positive for the first time since February 2007.

However, the trend charts for the US market averages (other than the DJT which has turned positive weeks ago) have not turned green (positive) yet. That could happen soon, which would give the all-clear signal.

The TSX turned green two weeks ago and is within a few percent of a new all time record high. This very clearly shows the relative strength of the TSX compared to other North American and global markets. I have been a strong advocate of investing primarily in Canada since May 2002.

After being in limbo, bond prices finally gave way as investors sold overvalued bonds to move into equities. It is not close to being oversold yet.

The short-term oscillators for gold and silver peaked last Thursday so the short-term rise in a longer-term downtrend seems to have ended. This means that there could be further declines/consolidation in the period ahead.

The long-term oscillators for gold and silver are declining and are getting close to the oversold level. When it turns back up again, that will suggest that the corrective phase is likely over.

The long-term trend chart for gold is still green (or positive) as it has been since July 2007. If it stays green throughout this corrective phase, it will indicate that this is only pause in a longer-term up trend.

The price of oil and the long-term oscillator continue to reach higher highs. Nothing negative so far.

The long term oscillator for the CAD$ has just turned up suggesting that the Loonie should rise again after being in a consolidation phase since last November after it hit $1.10 US. The Loonie usually follows the price of oil, so it is no surprise that the CAD$ should finally make some headway to the upside.

Data supplied by

FRIDAY’S GE-RELATED SELL-OFF LOOKS LIKE A STORM CLOUD. EQUITIES ARE BASEBUILDING AND CONSOLIDATING RECENT GAINS WHILE GOLD AND SILVER ARE CORRECTING.

After US markets advanced 4.2% for the week ending Apr. 4, they declined 2.7% last week. The S&P/TSX was flat for the week. The negative earnings surprise by venerable GE on Friday was blamed for the bulk of last week’s slide. While the 27 point (2%) sell-off for the SP 500 and the 226 point (1.6%) clipping for the TSX seemed like market volatility was reverting back to March levels, beneath the surface, equity markets were stronger than they appeared. For example, Money Flow (which tracks buying power and selling pressure as reported by Lowry Research) rose 9 points on Thursday when the SP 500 gained 6 points but only slipped 7 points when the SP 500 fell 27 points on Friday. This confirms what the oscillators are indicating. As you can see from the charts below, the long term oscillators for equity markets are still rising after turning positive on Mar. 24 while the short term oscillators are correcting after peaking a week ago. The technical indicators, together with low US interest rates, attractive valuations, wide spread pessimism and heavy insider buying build a convincing case that this is merely a consolidation phase in a longer term rising trend off of the lows. Sometimes the markets take off like a rocket (August 1982, October 1998) while in other cases a long period of base building is required (1994, October 2002). The current experience seems to be something in the middle of the two extremes, which is very normal. It is not unusual for a market low or peak to be confirmed many months after it actually occurs.

While equity prices are consolidating in a longer term up trend, gold and silver appear to be consolidating in a longer term downtrend. The comment with the gold chart in the Mar. 10, 2008 update when gold was trading at $976 stated that the oscillator "suggests that this rise is extended and in the later stages when risk becomes greater." The price of gold peaked a week later on Mar. 17 as it broke the $1,000 barrier and has traded in the low $900 range ever since. It is usually much safer and more profitable to make a purchase when the long term oscillator is very low and turns up, than to buy after a long up trend when it has been in the high range for a long time. Equities are the oversold assets at this time.

Bonds – Bonds are in a trading range and will probably stay that way until the trend in equities becomes more obvious. There is no clear trend at this time.

Commodities – The comment in the oil chart for the Feb. 11, 2008 update was, "although oil is not fully oversold it may be bottoming here." You can see on the top of the chart that, at the time of writing, oil was trading at $93.38. The comment with the Feb. 18, 2008 oil chart stated, "it is still likely that oil could have started a new up trend last week." On Feb. 18, the oil price was $96.21. Today it closed at another all-time high close to $112 per barrel. The current charts for oil still look healthy.

Currencies – The US$ seems to be consolidating/rising slightly against the CAD$ and euro after a serious decline versus the euro.

The short term oscillators for equity markets (SP 500 here) are declining after peaking a week ago, which suggests that we should experience a short consolidation phase since the long term oscillator is still rising as you can see from the following chart.

The long term oscillator for all the global equity indexes are still rising from deeply oversold levels which suggests that markets are still in a longer term up trend. These are much more reliable than the short term oscillators.

The short term oscillator for the TSX is retreating from the highs as well but the more important factor is that the longer term oscillators are rising. It does however provide a picture of what is happening.

The long term oscillator for the TSX is also rising after bottoming in December and January. The TSX and the long term oscillator have been stronger than other markets. In fact, before Friday’s 225 point decline, the TSX was the only major world market to post a gain for 2008.

Bonds are in limbo as investors try to discern whether interest rates have declined enough to strengthen the US economy later this year. Skittish investors are also parking money here until they feel more confident.

The long term oscillators for gold and silver are still declining and have more distance to travel from reaching the fully oversold area. At this point it seems like more time and/or decline is needed before the previous metals become strong performers once again.

The long term trend charts for gold are still green which means that the longer term up trend could still be in place after this corrective phase is over.

In contrast to gold, the long term oscillator for oil is still strong and is turning up again. This likely means another spurt to the upside.

It is amazing to see how long the up trend for oil has been since this chart turned green in early April 2007. This occurred after the long term oscillator for oil turned up and issued a buy signal on Mar. 26, 2007 when oil traded at $62.96US – a very profitable entry point as you can see. A gain of 77.5% in on year.

The long term oscillator for natural gas turned up from the fully oversold level on Aug. 8, 2007 at which time I issued a buy signal at a price of $6.24. Although the price declined even more shortly thereafter, at today’s price of $10.06 it is up 61.2% in 8 months – another very profitable low risk trade.

A lot of capital is borrowed from Japan where rates are very low, and invested in Europe where rates are higher. In response to a question from a hedge fund manager, I have included this euro-yen chart for the first time. According to the long term oscillator, the euro is in a clear up trend and has some time to go before reaching the overbought level.

The The CAD$ is experiencing some weakness compared to the US$ but it should be very mild. The CAD$ is getting close to reaching the fully oversold level.

Data supplied by

This trend chart of the US$ vs. the CAD$ shows that any rallies by the US$ have been weak and short. There is little to suggest that this pattern will change anytime soon.

• The trends, they are "a changing" – VIX Index, TSX, and DJT turn positive

• Remember, astute investors are not looking back at the past. They are looking ahead to see what will happen six to nine months from now.

• DJ Utilities Index finally joins the party, as expected.

• First quarter performance – Canada, you’re still the one.

Some of the critical long-term trend charts are now turning positive. As of Mar. 24, 2008, the long-term oscillators indicated that the retest of the January low was successful. The long term trend chart for the Volatility Index (VIX) has now turned positive for the first time in a year. The trend charts also turned positive for the S&P/TSX and the Dow Jones Transport index for the first time in months. This all suggests that the rise since maximum fear was created when Bear Stearns collapsed is stronger and more significant than previous rallies. There are many comments stating that we are heading into a 1930’s style depression. I know from my own experience, (you can verify this if you read Alan Greenspan’s book, The Age of Turbulence) that this headline has come up in almost every market correction since the 1970’s. Anyone who can recall the severe economic strangulation caused by 20% interest rates in 1981 and 1982 knows that the overall economy is much healthier now than it was in 1982, even though the US real estate market is very depressed. Major market lows are often defined by the failure of a major company, and the failure of Bear Stearns likely caused anyone that wanted to sell to liquidate. Once everyone that wants to sell has sold, the market only goes one way – up. Thus, indicators suggest that the worst-case scenario has been reflected in current prices and we are in the early stages of a long-term rise. When the long term trend charts turn positive for the other US market averages it will give the all-clear signal. That could happen at higher prices.

Last week’s update highlighted the Dow Jones Utilities Index (DJU), which had refused to budge off of the lows. The update showed that the long-term oscillator for the DJU turned up last Monday (March 31) and the DJU was indeed a top-performing sector last week with a 5.3% gain. It is positive that all sectors are now attracting capital.

In the update of Jan. 2, 2008, I wrote, “I still recommend that you invest primarily in Canada.” Even though the S&P/TSX declined 3.5% for the first quarter of 2008, it was still the best performing index in the world. In a mirror image of what happened in the 1980’s, and 1990’s, the SP 500 declined almost three times as much with a 9.9% loss while global markets fell 9.5%. (In Canadian dollars, the SP 500 lost 7.3% and the global MSCI drifted 6.9%.) Canadian equities have provided investors with more upside and less downside compared to most other markets. The risk/reward ratio is much better for Canada and I see no reason why that will change for many years to come. During today’s trading, the TSX reached 13,833, which is where it closed on Dec. 31, 2007.

Bonds – Bond prices should perform poorly if the equity markets are on a firmer footing.

Commodities – While oil can stay strong due to political/terrorism concerns and inelastic demand, gold and silver appear to be having a short-term rally in a longer term, declining trend. Funds appear to be switching out of commodities and into equities. This could last at least until the end of April.

Currencies – After being battered by the euro, the US$ is gaining some strength against the euro and the CAD$. However, if you look at the trend charts you can see that these rallies are more like pauses in a very long bear market. This could continue until there are signs of strength in the US economy which would mean an end to interest rate declines.

If you look closely on the right side you can see that the Volatility Index has finally turned red for the first time in a year. This signifies a change in the character and trend of the markets. However, a change in the Trend charts for the SP 500, DJI, NASDAQ and Russell 2000 is needed to give the all-clear signal.

The TSX has been one of the first world market averages to turn positive by turning green for the first time since last fall. See the green dot on the far right of the chart.

The Dow Jones Transports Index turned green (or positive) three weeks ago after being red (risk) since the middle of last year. You can see that this has usually resulted in a long uptrend for markets in the past.

Bond prices have had a good run since mid-2007 when equities hit the skids. That trend could change as equity markets improve.

Gold has had a sharp rally as the US$ lost value during 2007. It is still green but the long-term oscillator for silver and gold are declining, suggesting that they are in a consolidation/correction mode.

Oil prices also rose as the US$ declined. While people can stop buying gold if the price gets too high, the same cannot be said for oil. Put that together with the supply concerns due to terrorism and a potential conflict with Iran, and it seems like oil could continue to be strong, even though it is overbought and due for a rest.

This trend chart of the US$ vs. the CAD$ shows that any rallies by the US$ have been weak and short. There is little to suggest that this pattern will change anytime soon.

A very easy trade for currency traders to just short the US$ or go long the euro every time this chart turns red. Right now the US$ is recovering slightly after a sharp drop. The US$ could have a more substantial rally as soon as there is confidence that the US economy will improve.

Data supplied by