WE HAVE LIFT-OFF! MOST ALL LONG-TERM OSCILLATORS HAVE NOW TURNED UP, INDICATING THAT THE CORRECTION IS OVER. MARKETS ARE NOW IN AN UPTREND THAT SHOULD LAST AT LEAST SEVERAL MONTHS, IF NOT QUARTERS.

Two weeks ago, with equity markets in turmoil and a plethora of negative headlines, it seemed obvious that stocks were going to flounder for a long time. Many market experts told us as much. However, when it comes to investing, Joe Granville was right when he said, "The obvious is obviously wrong." Last week I wrote that a whole host of indicators suggest that equity markets have hit bottom as the long-term oscillators for the US Banking and Financial Services Indexes turned up on Jan. 28, 2008. Since these were the sectors that are at the center of the storm and dragged the markets lower, it only made sense that they should pull the markets higher too. That did, indeed, occur as the SP 500 ended last week higher for the second week in a row by gaining 4.9% as Bernanke brought out the bazooka, as mentioned in last week’s update. (The SP/TSX rose 3.3% last week.) Today, the long-term oscillators have turned up for most all of the equity indexes in the world, confirming the signal given by the financials last week and giving the ‘all clear’ signal for stocks. Since the markets have had a triple bottom (Aug. 16, Nov. 26, and Jan. 22) this new up trend should last at least a few months, if not a year. It takes courage to be positive and to buy when there is the bad news and uncertainty that accompanies every market decline. Mark Twain said, "Courage is resistance to fear, mastery of fear - not absence of fear." I have found that the technical tools below have helped to provide the courage and discipline required to make prudent and profitable decisions during trying times which, in hindsight, turn out to be near the market lows.

While reports mention that the current financial problems are totally new, or reminiscent of the Great Depression of the 1930’s, the markets and the Volatility Index are following a pattern almost identical to the path they followed during the Savings and Loan Crisis in 1990. Excessive lending during the real estate boom in the late 1980’s resulted in the outright failure of more than 1,000 US savings and loan companies costing the US government over $120 billion. At the time it was "the largest and costliest venture in public malfeasance and larceny of all time." Doesn’t that sound familiar! As the US economy and world markets were trying to work through this crisis, Iraq invaded Kuwait, causing a market downturn very similar to today's. The US markets peaked on July 16, 1990 (they peaked on July 16, 2007), experienced the first low on Aug. 23, 1990 (Aug.16 in 2007) and the final low five months later on Jan. 15, 1991 (Jan. 22 in 2008). In 1991, the markets experienced a dreadful start but made up for the entire loss in the first few weeks of 1991 so that the SP 500 ended the year with a 26.3% gain. I do not see why that cannot happen again, especially when taking into account the major cuts to US interest rates. Please see a Volatility Index chart comparing these time frames below.

Bonds – In previous analysis I mentioned that bond yields should bottom (and prices peak) when equities bottom. Bond yields likely bottomed two weeks ago even though short interest rates could decline even more in the months ahead.

Commodities – In previous analysis I also mentioned that commodity prices should start to rise when equity markets bottom as investors become more willing to assume risk. Most commodity prices should slowly begin new up trends. See gold and oil charts below.

Currencies – The flight to quality trade should continue to reverse since equities have likely hit bottom. The Canadian dollar and euro are gaining strength after I wrote that they were ready to rise in last week's update. Please see charts below.

Have a good week!

The long-term oscillator turned up for the SP 500 along with all the other US market averages today. The markets have risen for at least several months every time the oscillators have bottomed and turned up except for Dec. 10, 2007, which was a rare exception. The December signal only happened for NA markets.

This long-term chart of the Volatility (or Fear) Index back to 1987 shows how similar the pattern of investor behavior is now compared to the 1990 Savings and Loan Crisis. (Market volatility and fear peaks at market lows when investors panic.) The two long arrows point to these occasions. Other times when fear has reached an extreme are shown with the short arrows. From left to right they are: The Asian Currency Crisis in October 1997, The Russian Default Crisis and collapse of Long Term Capital Hedge Fund in the summer of 1998, the terrorist attacks of September 2001, the bear market lows in July and August of 2002 and the US invasion of Iraq together with the SARS virus in March 2003 which marked the beginning of a five year rise. Statistics show that since 1997, the markets have risen an average of 23.2% in the three or four months after reaching an extreme level like it just has. That would imply levels approaching record highs.

The SPX/TSX long-term oscillator turned up this week as well. Every move up from oversold levels in the past has occurred at points before strong gains were produced except for December 10, 1007 when it had a rare false signal. This is usually when the best returns are earned in the shortest time with the least risk.

The next several charts show you a sample of how the oscillator looks for some of the global markets. Here you can see that Brazil has also turned up just like it did at the end of August last year. You can see how accurate the signals were by comparing the troughs in the oscillator with the chart of the red and green line that represents the MSCI Brazil Index Fund. The oscillators are used primarily for determining market lows when they turn up from lows at oversold levels not market peaks.

The oscillator for Chinese stocks has also turned up from very oversold levels.

For an example of how things look in Europe, here you can see that the oscillator has turned up for Germany.

Stocks in the UK also dropped so low that the worst-case scenario was factored into current prices. The oscillator only gave a false signal in December for the North American market averages as you can see from these charts of foreign markets.

The long-term oscillator for the Volatility Index has peaked and turned down confirming a market low. The fact that the oscillator reached a lower low now than it did last August when the VIX Index peaked at the same level is also positive.

The oscillator for US bonds has had two peaks and has turned down once again. This confirms all the other indicators by showing that cash is moving out of overvalued bonds now that the risk is subsiding.

Although these oscillators are used primarily for buying when they reach a low level and turn up, they can be helpful at a peak. Here it looks like gold prices have peaked. It would make sense for the rise in gold prices to pause as investor fear dissipates, but stronger commodity prices in general should help gold in the longer run. Oil seems to be in the same position.

Last week I said the CAD$ was ready to rise and it should be strong for some time as the oscillator clearly turned up.

The Euro has been consolidating its gain since the equity turmoil began last fall but the oscillator is continuing to rise after turning up last week. This indicates that the Euro should gain strength as the US$ weakens as US interest rates decline an as the flight of quality trade into the greenback reverses.

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