Last week there were 13.8% more bears than bulls, which pretty well matched the maximum spread in over a decade only reached at the end of the bear market in October 2002. By narrowing to -4.4% today, this indicator has issued a buy signal according to Investors Intelligence.

Gold promptly corrected after breaking the $1,000 barrier. After the price moves down enough to change it from green to red, it usually rises for three days or so before continuing the decline. If the equity correction is over, the US$ could strengthen which could hurt gold prices. Theses short-term charts should only be used in conjunction with other tools.

Just look at the far right of this chart. These short-term charts are helpful when used with the longer-term indicators. According to other tools, it looks as though the equity correction could be over. If that is the case, the markets should pause for three days or so since prices have risen enough to change the indicator from red to green. Then the advance should continue. This is just the opposite of what is happening with the gold chart.

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UNEVEN VALUATIONS FINALLY DIVERT THE FLOW FROM THE RIVER-OF-EXCESS-LIQUIDITY AWAY FROM COMMODITIES, TO THE FINANCIALS, WHERE THE DROUGHT IS. THERE IS GREATER CERTAINTY THAT THE RETEST HAS BEEN SUCCESSFUL.

While central bankers around the globe have been flooding the financial system with money to support businesses and the economy, most of the funds seemed to be moving into commodities. This had the unintended effect of increasing the prospects for inflation instead of strengthening and stabilizing the economy. Last week, a flurry of activity by the Fed to reduce rates and limit the fallout of the problems at Bear Stearns finally made the financials so attractive that astute investors took their profits from the extended commodities and ploughed it into the depressed financial stocks. This why the SP 500 rose 3.2% last week while the TSX declined 3.4%. A stronger US market will help the TSX to recover in due course.

In recent weeks, I have pointing out that gold has had a long run since the summer of 2007, when the long-term oscillator turned up from an oversold level and that this indicator was now showing signs of weakness. It is usually much safer and more profitable to invest in assets that have performed poorly, which are turning up from very oversold levels, than in assets that have already risen for six to nine months after the long-term oscillator turned up from the fully oversold level. Therefore, if this retest has indeed been successful (please see comments with charts below), commodity prices should consolidate recent gains while sectors that have performed poorly (such as financials, consumer stocks, etc.) could turn in the best performance. Market lows have often been marked by the overwhelming emotions of fear and worry produced by the failure of a major financial corporation like Bear Stearns. Realize this and profit from it. Today the markets are responding to JP Morgan Chase raising the price it will pay for Bear Stearns from $2 to $10, showing that emotions and valuations became ridiculous. The decline in Lehman Brothers stock price from $40 down to $20 and back up the $40 last week is called an "island reversal" in technical terms according to a major investment firm. This is something that also occurs at a market low. Last week’s market action, very low interest rates, strong levels of insider buying, and high levels of pessimism in advisory sentiment together with the long-term oscillators rising mean that most of the signs that one could expect to see at a the beginning of a rise are now present. The picture is never perfect. Hopefully the few signs that are missing, such as a reversal in buying power and selling pressure will be seen in the days ahead. I will continue to do my best to keep you informed.

Bonds – Bond prices usually provide poor returns after an equity market low. Look for yields to move higher (and prices lower) to confirm that confidence and an appetite for assuming risk is returning to the equity markets.

Commodities – The long-term oscillators gave buy signals for gold in June 2007 and natural gas on Aug. 8, 2007. Two weeks ago, a story about gold made the cover of the Globe and Mail, Canada’s major newspaper – often a dangerous sign. Under the gold chart found in the Mar. 10, 2008 update the comment stated that oscillator showed signs of weakness. The run in commodities prices, many to record highs, is due for at least a pause after speculators take profits to invest in assets that are depressed, have less risk and greater potential for gains. Oil became somewhat oversold in January so it may be a little stronger. Oil is also subject to more political/terrorist factors than other commodities. Stronger US equities should help the US$ move higher.

Currencies – If the corrective action in equity markets since last summer has ended, it would make sense for the US$ to make a recovery after dropping sharply against the euro, since the US is where most of the problem loans came from. Watch for further strength in the financials and equity markets to help determine the trend of currencies compared to the US$.

This shows the "island reversal" of Lehman Bothers last week as the share price dropped from $40 down to $20 and back to $40 due to misplaced fears that it might fail too. If you look closely, you can see that the long-term oscillator has now risen sharply from the fully oversold level, which has been profitable in the past.

The long-term oscillator for the US Financial Services Index has turned up again, but from a higher low than in January, even though the Index declined to a lower low. This is positive. This is what happened at the successful retest of the October 2002 low and the minor 2004 low (see above).

The same thing has occurred with the long-term oscillator for the US Banking Index. This is technical evidence that the retest has been successful for the US Financial sectors. If the worst is over for those sectors, it should enable the rest of the market to get back to normal too.

After a very rare double or even triple low for the long-term oscillator for the SP 500, it has once again turned up from a very oversold level. The performance of the financials is key to a continued recovery here.

After outperforming the US markets since January, this week the TSX was hurt by the decline in commodities. This is likely to be temporary, as a rising US market confirms that the US economy will recover later in the year. In fact, the TSX has already recovered more than one half of last week’s loss today.

Gold experienced a sharp drop just as it reached the psychological barrier of $1,000 for the first time. It was due for a correction after such a long, strong rise. A recovery in the US$ is also responsible for this decline. A recovery for the greenback and pause for gold could last for at least six weeks or so.

This chart shows that the US$ was somewhat oversold compared to the CAD$ and is now recovering while the CAD$ weakened along with commodity prices. The trading range has been narrow during recent months and could stay that way.

The US$ is more oversold compared to the euro and has turned up. However, in recent years these rallies have been minor advances in an ongoing bear market. That is likely to be the case this time too.

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THE WITCH IS DEAD BUT WHAT ABOUT THE BEAR? ADVISORY SENTIMENT, A KEY PIECE OF THE PUZZLE, FALLS INTO PLACE.

In the last update, I wrote that the markets were consolidating, while in the financials retested the Jan. 23 lows. The Mar. 10 update presented evidence to show why the retest should be successful and stated the equities could start a major rise any day. Twenty four hours after you received that updated, US equity markets produced the biggest gains in five years. While Eliot the zealot clearly exited the political scene and will not haunt corporate officials any longer, does Tuesday's action mean that the bear has gone into hibernation?

On Mar. 12, one more key piece of the investment puzzle fell into place. The sentiment of market experts has a record of reaching high levels of optimism around market peaks, and higher levels of pessimism near market bottoms. On Mar. 12, Investors Intelligence (see the chart below reprinted with their permission) reported that pessimism had now reached levels only seen at the end of serious declines in fall 1998 and after Sept. 11, 2001. As you can see, the level now is only two percent away from matching the highest level of pessimism reached anytime during the last decade, which occurred at the end of the long bear market in October 2002. This is a very positive development, which supports the case that we are witnessing a bottoming process. The three charts after the sentiment chart show what we will need to see for confirmation that the bear has also left New York. Please take a moment to observe them.

The long Trend indicator for the Volatility Index has been in an up trend since February 2007. When volatility is reduced enough for this to finally turn red, it will indicate that the corrective phase is over.

The trend charts for most all market averages have been red, like this one for the SP 500 Index. When this turns green along with most other global markets, it will also be a sign that a new up trend is underway.

The same is true for the TSX. You can see how long most of the up trends have lasted in the TSX when this indicator has turned from red to green since 2003.

This chart going back to 1999 shows that the trend indicator stayed red during powerful rallies in January and April 2001, and in July 2002 showing that they were only rallies in a bear market. This indicator needs to turn green in coming weeks if the current bear market/corrective phase is over.

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