INDICATORS SUGGEST THAT NEW LONGER TERM UPTREND THAT BEGAN JAN. 23 IS STILL INTACT IN SPITE OF LAST WEEKS DECLINE. TSX IS THE BEST PERFORMING INDEX IN THE WORLD FOR 2008.

My headline last week said "We have lift-off." After a 10% rise from the Jan. 23 lows, last week the SP 500 declined 4.6% and the TSX declined 2.5%, creating doubt that a bottom was created. The long-term oscillators, which have been very reliable in determining previous market lows, are still rising from extremely oversold levels indicating that the up trend that began three weeks ago is still intact and should continue for at least weeks if not months. While the market’s movements over the past three weeks seemed to leave many investors and analysts scratching their heads, the market action is now is following the same pattern as it did when the last bull market started in March 2003. The five year bull market that ended last summer began on Mar. 12, 2003. At the final end of the bear market in 2003, the SP 500 rose 13.5% in nine days from Mar. 12 - 21 and then corrected by 5.3% over ten days by Mar. 31 before rising another 19.4% in only 3 months. This time the SP 500 rose 9.9% in nine days from Jan. 23 to Feb. 1 and declined 5.7% in the following ten days up to today. Please see a chart of the March 2003 low below. While some key elements of a strong rise are missing, (such as a 9 to 1 day of advancing volume over declining volume) new momentum upturns in the financials, retailers and housing sectors in the face of negative news supports what the oscillators are telling us. Rising bond yields, along with advances in key commodity prices such as copper provides additional evidence that there has been a major reversal in trends for most all investments. Only time will tell for certain.

While Warren Buffet says that he is sitting on his cash because he doesn’t see any attractive values yet, for weeks now, insiders have been buying shares in their own companies at levels only seen in the vicinity of other market lows. In my 26 years of experience as an investment professional, I have found that it is better to trust indicators that have no emotions or motives attached to them instead of the opinions of one or two people, in spite of their past record.

In last weeks update I included the oscillators for some global markets. This week I have included the oscillators for other US market averages such as the DJIA, NASDAQ, Russell 2000 and Banking Index. Please see these below along with other charts for bonds, gold, oil, and currencies.

Bonds – Several weeks ago I mentioned that bonds were overvalued. Last week bond prices fell (and yields rose) as the demand for new US bonds declined in the face of low yields that barely protect one from inflation. This indicates that investors are more willing to assume risk. According to the oscillators, this trend should continue.

Commodities – Uptrends in commodity prices should strengthen as the appetite for risk increases and lower interest rates sow the seeds for the next recovery.

Currencies – The US$ has appreciated in four out of the last five recessions but the US$ was not in a severe downtrend during previous recessions like it has been now. Although the US$ still seems to benefit from the flight to quality and safety during turbulent times, signs of longer term weakness still seem to remain. This means that other currencies should rise in value. According to the oscillators, the CAD$ is in longer term up trend while the euro makes an adjustment to reflect the change in policy to a more accommodative stance.

This is a chart of the SP 500 Index of late 2002 and early 2003. As explained above, the SP 500 started the last bull market during 2003 in the same way that this current advance has started since Jan. 23.

Last week I displayed the oscillators for the SP 500 and some other global markets. Since this seems to be a significant turning point I want to show you how the oscillators look for some other US indices.

Here you can see that the NASDAQ has also turned up from very oversold levels. You can see that these signals have been very reliable in the past. The green line above is the level of the NASDAQ index.

The long-term oscillator for the small cap Russell 2000 Index has also turned up. You can see that these signals (turning up from very oversold levels) do not occur often, but when they do, it is significant.

The oscillators for the badly beaten US Banking and Financial Services sectors are still rising and have much farther to go. Even though there is still bad news coming out, the Banking Index is up 16% since the lows.

The oscillator for the TSX is still strong after last week’s decline, suggesting that it was just a temporary setback. This confirms what all the other indicators are saying – we are still in a rising trend.

The US bond oscillator continues its decline, suggesting that bond prices have the potential to weaken further.

Gold could be pausing/consolidating here after a nice rise. The oscillators are useful as a buying tool when they turn up from oversold levels. It is not as accurate for a selling tool.

Although oil is not fully oversold, it may be bottoming here. It would make sense for oil and most other commodity prices to strengthen gradually as investor confidence is slowly restored.

The Canadian dollar and other currencies should gain strength as the flight to quality trade reverses. Higher oil and commodity prices will help the Loonie.

Last week the UK lowered rates. The euro dipped as the ECB finally acknowledged a global slowdown and declared that they might lower rates in the future. We will have to wait for the oscillator to turn back up to indicate that it will start a new advance.

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