US FINANCIALS AND MARKET AVERAGES ARE FOLLOWING A CLASSIC RETEST SCENARIO RIGHT ON SCHEDULE. SOME GLOBAL MARKET AVERAGES SUCH AS THE S&P/TSX INDEX AND COMMODITY PRICES ARE MUCH HIGHER NOW THAN THEY WERE ON JAN. 23 SUGGESTING THAT THE RETEST SHOULD BE SUCCESSFUL. WATCH FOR A DYNAMIC RISE, WHICH CAN BEGIN ANY DAY, AS CONFIRMATION.

During a corrective phase it is very normal for prices to fall sharply, stage a comeback, and then fall to within 1% to 2% of the previous low six to eight weeks later. If prices hold near the levels of the previous low, this often marks the end of the corrective phase (which, in this case, began in July 2007) and is followed by a new long-term up trend. Most US market averages, the US Banking Index and the US Financial Services Index are now in the range of 1 to 2% of the January lows. Mar. 12 will be exactly seven weeks after the Jan. 23 low, which was the initial intraday low for US markets. At the time of writing this update, some global markets are noticeably higher than they were at the January lows, while over half of the commodities that make up the CRB Index are close to the record high prices they reached last week. For example, the TSX is still 8.2% above the January low. The Volatility Index had a high of 29.73 today, which is down 20.87% from the peak of 37.57 that it reached on Jan. 22 at the height of panic selling. This is also positive. The fact that the US markets are following the classic pattern of a retest, while many indicators are much more positive now than they were seven weeks ago, makes a compelling case that this retest should be successful. The downside volatility during a retest of the lows is never pleasant. However, the long, strong rise that usually follows a successful retest certainly is. We are now in the time frame where a retest usually ends, while the short and long-term oscillators for the US markets oversold enough that they can turn up and rise soon. If these lows hold, the markets should respond very positively with renewed buying and short covering. Please see the charts and brief comments below.

An additional positive factor is the action of the long-term oscillator for the Dow Jones Utilities Index. It has been declining since December, indicating that this major sector has not been doing any heavy lifting this year. The long-term oscillator has now finally reached the most oversold level in years, so it is ready to turn up. Having all the sectors in gear should be able to produce strength that has so far been lacking during previous rallies from market lows.

Bonds – At a yield of 3.45%, US 10-year bond yields are also retesting the January lows of 3.42%. Lower yields will indicate that the investors are expecting the situation to get worse, while rising yields will indicate that investors are confident that the worst case has been factored into current prices.

Commodities – The extra liquidity pumped into the global economic system seems to have moved into commodities. Strong commodity prices are a sign of strong global demand and therefore economic growth – not contraction. While the up trends still seem to be in place, the gains are becoming protracted.

Currencies – The CAD$ weakened as the Bank of Canada made the biggest cut to interest rates since Sept. 11, 2001. A major rate cut by the Fed on Mar. 18 could help the CAD$. Record high oil prices have not helped the CAD$. After a rise of historical proportions in 2007, it would be very normal for the Loonie to consolidate its gain for much of 2008.

The low point of the red graph is January and the present illustrating the double bottom in the US Banking Index and US Financial Services. The olive colorred short-term oscillator is at the fully oversold level.

This chart shows the double bottom of the SP 500 Index. The short-term oscillator is very close to the fully oversold position as well. This is often when sharp, short rallies occur.

The long-term oscillators for most US market averages look similar to this chart of the SP 500. It is also making a rare double bottom at a very low oversold level where markets have risen for longer periods in the past.

The long-term oscillator for the DJ Utilities Index has been declining since December. It has only been oversold this much one time since 2003 and that was in 2006 before it rose 33% in 13 months. Strength in this influential sector has a major influence on market trends.

The current low on the TSX is much higher than the January low. The long-term oscillator is also much higher. This relative strength makes a case that the January lows will hold and that the TSX will continue to be a top performer when the US markets come back.

The markets and long-term oscillators of the UK, Brazil, and Japan look similar to this chart for Germany. The market is not as low as it was in January and the long term oscillator is already moving up from the lows which usually means that the trend is for higher prices compared to January, not lower.

You can see that the level of the Volatility Index is lower now than the peaks of Aug. 16, 2007 and Jan. 23, 2008. The peaks of the long-term oscillator have also declined each time the VIX hit high levels. This is a sign of weakness in an extended up trend, which in this case, is positive for equities.

You can see that US 30-year government bond prices (at $118.47) are lower now than they were at the peak (close to $123) in January. This indicates that there is not as much fear and worry as there was during the January low – a positive divergence lending support to a successful retest for equities.

Oil prices are on a tear (all time inflation adjusted record high $107.48) since the long-term oscillator turned up on Feb. 18 at a price of $96.21. It appears that there is still more upside before a pause.

Gold has had a long run since the long-term oscillator turned up in June 2007. The fact that gold is much higher now than it was last fall, while the long term oscillator is not moving as high now as it did in late 2007, suggests that this rise is extended and in the later stages when the risk becomes greater.

In spite of record high oil prices, the CAD$ has made little progress compared to the euro since the long-term oscillators turned up Feb. 4. This could be due to the strong rise as you can see in 2007.

The euro still seems to have more room to rise before reaching overbought territory as euro rates stay the same while US rates are poised to drop again on or before Mar. 18.

Data supplied by

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.

Data supplied by