MARKETS WERE OVERBOUGHT IN THE SHORT TERM BY LAST WEDNESDAY. THIS LIKELY MEANS A PERIOD OF BASE BUILDING FOR A WEEK OR SO. DJ UTILITIES INDEX TESTING LOWS.

Last week equity markets reached the overbought stage (see chart below) after the SP 500 rose 4.1% and the TSX rose 7.3% since Feb. 6, 2008. Action this week could show us that this is a consolidation stage while DJU, Banking, and Financial indexes retest the January lows.

CAN WORLD MARKETS AND ECONOMIES IMPROVE WITHOUT THE US JOINING IN?

What happens in the US has been, perhaps, the major factor affecting most world markets and economies for past decades. Therefore, all eyes are now focused on the US predicament because of the implications that a recession would have on the rest of the world. But how important is it in reality? Can world markets and economies improve even if US markets decline and their economy is in a slowdown? Looking back to the 1970’s can help us answer this question.

First of all, there is next to no evidence that world markets in general can rise for very long if US markets are declining. When US markets fall, it seems like all the world markets decline – there is no place to hide. While trend of the market averages in the "land of the Cadillac and the 45" just about always determines the trend of other global markets, the magnitude of returns can vary greatly. For example, the SP 500 declined almost 50% during the 1973-74 recession while the TSX declined 36%. From the 1974 low to the 1980 high, the SP 500 rose 125% while the TSX rose 182%. During 1978 and 1979 the SP 500 made no progress while the TSX increased by 81.6% and the Japanese Nikkei Stock Average gained over 26%. In the 1970’s and 1980’s, Japan’s economic clout was building just as China’s power is building now. Everything has its cycles.

As mentioned in the Issues 1 and 2 from January, the long term cycle that favored resources and commodities in the 1970’s is back. In the 1970’s, the US faced difficulties while the Canadian economy, markets, and currency were strong. For 20 years after the resource bubble burst in 1981, Canada had its fair share of challenges while everything American seemed to be on fire until the technology bubble burst in 2001. It is very obvious that we are in another resource boom. Past history suggests that it should continue for another seven years or so. This means that Canadian and other resource economies together with their equity markets can continue to perform very well even if the US economy and markets make little progress. Therefore Canada is most likely the place to invest in to outperform the US and major international markets for this decade and part of the next, just as the US was the place to invest in during the 1980’s and 1990’s. Market experts often point out that US and International markets outperformed Canadian investments over the long term. The problem is that "the long term" largely includes the 1980’s and 1990’s when the US was in its heyday. Going back 50 years shows that the TSX slightly outperformed the SP 500 Index with no currency risk but this statistic seems to be all but ignored. The out-performance of the TSX index is likely to continue for some time even if the US struggles a little. To answer the question above, as long as US markets do not decline, other markets and economies can still do quite well. Please see charts and comments below.

Bonds – Yields also retest January lows.

Commodities – 10 of 19 commodities that make up the CRB index hit all time highs. It seems as though this is where the increased liquidity is going.

Currencies - CAD$ and euro still seem to be trending higher.

Short term equity oscillators peaked on Wednesday as markets became overbought after a multi-week advance. How the DJU, Banking Index, and Financial Index retest the lows will affect market action this week.

The long term oscillator for the SP 500 is doing some more base building in the oversold level which is very rare. It just about always turns up and stays in an up trend from a low. A new dynamic up trend could begin for US markets once the retest by the DJU, BKX and IYG are over.

Long term oscillator for the TSX is still rising since the January lows.

TSX has just dipped slightly after a steep advance and is still very clearly in a short term up trend.

Compare the trend from 1985 - 2000 and the trend from 2003 to the present for the SP 500 (shown here) to the same time periods for the TSX below. See how strong the SP 500 is up to the 2000 high but it is unable to rise much above it ever since.

The TSX was not as strong as the SP 500 up to 2000 but has performed much better since 2003 by moving well beyond the 2000 high.

The Japanese market performed very well during the 1970’s with much smaller declines than the SP 500 during the recessions of 1974 and 1982, and the 1987 Crash. The Chinese economy could now have the same impact and be on the same trajectory as the Japanese economy was in the 1970’s with a US slowdown having little impact.

Gold is still strong but the rise is getting extended.

At $103.36 oil is in the range of a new all time inflation adjusted high but can still rise more before reaching over-bought territory.

The CAD$ is rising slowly after an advance of historical proportions last year. The Bank of Canada meets tomorrow so that might relieve some pressure.

After a sharp advance the euro is still not over bought.

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