MARKETS APPEAR POISED TO BREAKOUT ON THE UPSIDE

After rising 10% from the Jan. 23 lows in a very short period of time, the markets needed to consolidate these gains. This is very normal. The markets followed the same path in 2003, as I explained in last week’s update. As you can see from my first chart of the SP 500, the pattern of lower highs and higher lows in the last month is converging to a point. This is a classic sign of a breakout, either to the upside or the downside. So which will it be? All the long-term oscillators have turned up from extremely oversold levels in recent weeks, as they typically do at the end of market declines. This is very strong evidence that the markets started a longer-term up trend in January. Moreover, the short term oscillators (which I rarely refer to due to their short term significance) for the US financial sectors (as shown on the second chart) have fully corrected the steep rise since Jan. 23 and are now ready to turn up from very oversold levels. The financial stocks are at the center of this market cyclone and have lead stocks higher and lower since last summer. If they are now ready to rise for both the long term and the short term, I think you will agree that it only makes sense that the breakout will be to the upside any day now.

While Insiders have been big buyers of stocks recently, investment experts are becoming more and more pessimistic. For example, in Feb. 16’s Globe and Mail, investment manager Avner Mandelman writes that investors will need "judgement and conviction to battle this bear." High levels of pessimism is another major sign of a market low and there are now pretty well the same number of bullish and bearish advisors according to Investor’s Intelligence. The third chart shows the spread between the bullish and bearish advisors is now at the point where markets have typically produced major gains in the past. There is still a lot of concern and negative news but that is very normal during the early phase of a market rise. This is why the saying developed that markets usually "climb the wall of worry." While the media focuses on the consumer, the fact that US corporations have more cash on hand than they have ever had before seems to be overlooked. I recently saw statistics showing that ten times as many companies are raising their dividends than cutting them. Canadian bank stocks are producing dividends that are described as being at "unheard of levels." Don’t rely on the media for well-rounded information!

As I mentioned in a December update, it doesn’t really matter how much good news or bad news there is, what matters most is how much of the good or bad news is already reflected into current prices. The judgement from the indicators that I have found to be the most reliable is that the markets should still be in an upward trend for some time. I trust that this will give you the conviction to make prudent investment decisions in spite of all the negativity and bearish opinions which are always in ample supply at market lows.

Bonds - Ten year US bond yields have risen sharply from 3.5% a month ago to 3.77% now. This implies that the appetite for risk could be increasing while the flight to quality trade is reversing. It could also be evidence of the desire by global investors to get out of US assets.

Commodities - Rising commodity prices also confirm that there is more appetite for risk and that lower rates are sowing the seeds for recovery. Even though the IMF announced that it will sell gold bullion in April, severe power outages in South Africa are reducing the supply. Oil prices may have started a new up trend.

Currencies –The long-term oscillators for the CAD$ and the Euro are still in an up trend, suggesting further strength as the flight to safety trade reverses. Like the CAD$ rise in 2007, the biggest moves are sometimes seen at the end of a move to the upside after a slow start.

US markets are poised to breakout of a trading range that is getting smaller and smaller.

The short-term oscillators for the US Banking Index and Financial Services sectors look like this – oversold and ready to rise. What makes this bottom more significant than most others is that the long-term oscillators are now rising too.

This chart from Investors Intelligence shows the spread between Bullish and Bearish Advisors on the bottom and a corresponding chart of the SP 500 Index going back to 1998 on the top. While there were actually about 10% on average more Bears than Bulls at the 1998 low, the Sept. 11, 2001 low and the bear market low in October 2002, this is the second lowest spread since 2003. If you look at the SP 500 chart above every low point on the bottom chart when there was lots of pessimism, you can see that the markets rose noticeably for many months after. Ideally, pessimism should retreat and the spread should widen to confirm a market low.

The long term oscillators for the US financial sectors are still rising with a long way to go before over bought levels are reached.

The oscillators for the US market averages are still rising, implying that this was just a consolidation following a big move to the upside after Jan. 23.

The long-term oscillator for the TSX is still rising from a deeply oversold level along with the long-term oscillators for all other major global markets. A rise in unison like this is very positive.

Bond prices likely peaked when stocks bottomed in January. Lower interest rates are sowing the seeds for the next recovery. The weak US$ has caused US inflation to rise. Bonds could be starting to factor in higher inflation, which could be a problem once the recovery is underway.

Gold may be stabilizing and could start to rise again soon.

The long-term oscillator for oil has turned up. Although an upturn from fully oversold levels are often more reliable, it is still likely that oil could have started a new up trend last week.

The outlook for the CAD$ is still very positive. You can see that these signals have been extremely accurate in the past.

The recent course correction by the ECB now seems to be factored into the current value of the Euro. It is now ready to resume its up trend along with other currencies according to this long-term oscillator.