TSX BREAKS OUT WITH 2.85% GAIN LAST WEEK WHILE US MARKETS SEEM TO BE A WEEK BEHIND. MAJOR INCREASES IN THE PRICE OF COPPER, GOLD, OIL, WHEAT AND COST OF SHIPPING SINCE JAN. 23 ARE NOT SIGNS OF A SEVERE SLOWDOWN. THEY ARE SIGNS THAT LOWER INTEREST RATES ARE SOWING SEEDS FOR A GLOBAL RECOVERY WITH OR WITHOUT THE US.

While there are still many negative news reports and comments from market experts, global investors are voting with their money by pushing up commodity and raw material prices, in some cases to new all-time highs. These gauges of global industrial demand argue that the increase in liquidity since January is having the desired affect. While the US economy could still perform poorly for a while, it seems as though the growth in Asia and the economies that benefit from higher resource prices will continue. While there are still some signs of a new bull market missing, the strength of global markets in the coming weeks should provide investors with more evidence to come to a conclusion.

With this in mind, in today’s update I have displayed the short-term and long-term trend charts I use instead of the oscillators. In recent weeks, the long-term oscillators for most all global equity markets and commodities have turned up from oversold levels. The oscillators are very accurate for determining bottoms. The trend charts confirm what the oscillators are indicating when they turn green for the short-term and then for the long-term. Please see charts and comments for equities, bonds, commodities and currencies below.

The long term Trend chart for the TSX has been red since November and needs to turn green during this up trend to indicate that this is a new bull market rise and not a rally in a bear market. You can see how clear and accurate this has been in the past.

As is the case with the TSX, the long term Trend charts for the SP 500, DJIA, NASDAQ and other global market averages should all turn green to confirm that this is not a bear market rally.

The short-term trend chart for the TSX turned green over a week ago while the SP 500 short-term chart is still red. While they can sometimes be helpful, I believe that it is more important to focus on the long-term charts than the short term.

The Volatility Index peaks and turns green when the market bottoms and turns red when the market rallies. It has been green since early 2007. Turning red would be a very positive confirming signal that the corrective phase, which began last summer, is over.

Like the Volatility Index, government bond prices usually peak when equities bottom as the flight to quality trade reverses. Bond prices have fallen since the January peak and yields have increased. When this bond chart turns red it will be another confirming signal that this is a strongest equity rally since last summer.

Gold has been strong since the long-term oscillator issued a buy signal by turning up from a deeply oversold level last July.

The long-term trend chart for gold has also been very strong after a yearlong consolidation that ended in the summer of 2007 when the long-term oscillator turned up last July.

The short-term trend chart for oil turned green over a week ago shortly before the long-term oscillator turned up Feb. 18.

The long-term trend chart for oil has been positive since February 2007 when I issued a long-term buy signal for oil (at $62.96 US) and oil stocks. That coincided with the long-term oscillator turning up from a low.

The long-term oscillator for the CAD$ turned up on Feb. 12, 2007 at $0.8507 US and the long-term trend chart turned green shortly thereafter. It has just turned green again after the long-term oscillator turned up three weeks ago on Feb. 4.

The euro has been green and in a steady up trend since Fall 2006. The long-term oscillator is rising which suggests that it could have another advance as the flight to safety trade into the US$ reverses.

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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.

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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