Green = up trend

Red = risk

Going through a long bear market is perhaps the most stressful aspect of being a money manager. To have a discipline for selling can help to reduce the negative effects of a major decline. You can see that this chart was green throughout 1999 and most of 2000 catching most of the gains before turning red in the Fall of 2000. This marked the beginning of the longest bear markets in recent history. This was a clear sign of higher risk had caused extreme over valuation in many stocks. Even though there were strong four to six week rallies in January 2001 and April 2001 as the US Federal Reserve lowered interest rates, this chart stayed red, indicating that these were just rallies within a long term decline. The indicator finally turned green again seven weeks after Sept. 11, 2001 before turning red again in the Spring of 2002 as the last major decline of the bear market unfolded. It turned green briefly before 2003 before turning red for the last time as the US prepared to attack Iraq. As the markets rose after the invasion, it turned green and stayed positive for a year. No indicator is perfect. However, using this indicator as a selling discipline along with the other indicators I use, have enabled me to avoid a serious decline and have a strong conviction about the trend of the markets. This is the best indicator for selling that I have discovered in my 26 years of research.

SP 500 and SP/TSX - Up trend is still intact according to all indicators except the long term Volatility Index chart. I am concerned about what might happen in the July to October time frame.

Gold stocks - Gold stocks are very oversold and could be close to a turning point even though there is no such evidence for bullion prices. Gold stocks had a 3% up day on May 31.

Bonds - It looks like Canadian bond yields may have reached some sort of peak. US bond yields could be close to peaking in the coming weeks. That should be positive for equity prices and should add strength to any rally in Canadian bonds.

Currencies - The US$ vs. euro chart shows that the US$ still appears to be in an up trend versus the euro (since it gave a buy signal several weeks ago) even though progress is slow. The Canadian dollar is overbought versus the US$. With CIBC predicting parity by the end of this year, the oscillator shows no signs of turning yet, meaning that the up trend is still intact. Keep in mind that by the time this oscillator turns the CAD$ could already be 2% or so off of the highs.

POSITIVE AND NEGATIVE FOR EQUITIES

Positives

• Massive buyouts are shrinking for supply of stocks
• Companies are buying back their own shares instead of bringing new issues to the market
• China has close to a trillion dollars it wants to invest in companies around the world
• SP 500 earnings are double what they were when the index was at the same level seven years ago
• Third year of a Presidential cycle usually produces good returns
• Short positions for US markets are at an all-time record high

Negatives

• At 1,578 days this rise is the longest bull market ever without a 10% correct. 1,344 days was the previous record before the Crash of 1987.
• Markets usually follow a cycle where there is a major decline every four years. Exceptions are after the 1929 - 1932 bear market that peaked in 1937 before declining and after the 1981 - 1982 bear market the also rose five years to 1987 before falling. Currently, since the 2000 - 2002 bear market, stocks have been rising four and one half years into 2007. Interesting pattern of years ending in 2 and 7!
• According to Ron Miesels of Phases and Cycles Inc., ever since 1887, years ending in 7 have an unblemished record of providing bad news and bad surprises
• Extremely high insider selling for many months
• A one year 206% rise in the Chinese stock market has created an investment frenzy among inexperienced investors to the point that it is causing labor shortages. For example, 10% of all maids in Shanghai have quit their jobs because they are making more money investing than they can by working.
• Seasonally, the markets are usually the weakest between July and October.

We are likely closer to a market decline than a new bull market. The decline could be serious. Successful investors require a discipline for selling. I will do my best to use the tools I have shared with you to guide us through the months ahead. This is probably a time to be aware and alert, not complacent!

The oscillator has turned up without reaching the fully overbought range as it did in the spring of 2006. So far the other VIX indicators I watch have not confirmed a change in trend but we will have to watch this closely to see if this is suggesting that the rally might be over.

The oscillator is still rising suggesting that the up trend is continuing.

This oscillator is still in a clear downtrend some distance from the oversold level. While the price of gold rose $10 or so last week, I like to wait for this to turn up before investing in gold itself. Gold stocks, however, can move up ahead of the gold price and they also rose over 3% May 31, so this will be interesting to watch in coming weeks.