EQUITIES CONTINUE TO CONSOLIDATE RECENT GAINS. US FINANCIALS RETEST LOWS ANOTHER TIME, RESULTING IN A SHARP DROP IN OPTIMISM WHILE OIL AND COMMODITY PRICES RETREAT. IT SEEMS LIKE EVERYTHING IS IN A STATE OF TRANSITION. WHAT WILL THE NEXT MAJOR MOVE BE?

After today's close, the SP 500 is down 2.8% after peaking on May 19, while the TSX is down 1.5% after reaching an all-time high on May 20. Soon after prices of commodities like rice and copper peaked, oil prices followed by reaching an all-time high on May 22. Similar to the Goldilocks story, oil prices were too hot, equities were just right, and US financials were too cold. So what happens next? Does oil and gold spike while equities resume a bear market, or does oil fall, enable equities to rise? Or does everything just stabilize for awhile?

While there have been some bid daily declines for equities, the figures above show that prices have been holding up quite well. According to Investors Intelligence, the recent volatility resulted in the number of bulls falling from 47% to 38% this week, bringing the spread between the bulls and the bears to only 5.7% from 16.5% the week before. Anything below 15% is positive. The US Banking Index appears to be testing its low for the fourth time, creating very oversold conditions for US equity markets. The long-term trend charts for equities are still positive. Putting this all together, it seems as though the risk for equities is low. So far it seems as though this is just an orderly pause after a sharp rise from the March lows for the TSX, and a gradual up trend for US equities.

As the bear markets ended in March 2003, the SP 500 bottomed on Mar. 14 and peaked in June 18. Then US stocks consolidated its gains for only two weeks before continuing the up trend. This year the SP 500 bottomed on Mar. 17 too. While conditions seem to be ripe for a powerful advance after this consolidation phase is over, the US financials need to show some strength to enable this to occur. While the US financials are weak, the long term trend indicator for the Canadian financials have turned positive for the first time since last fall. This is another sign that the next major move for equities should be up, instead of down.

It is always interesting review comments from the past in the Update for June 4, 2007, before there was any hint of sub-prime problems, I listed the positives and negatives for equities with the following conclusion, "We are likely closer to a market decline than a new bull market. The decline could be serious. This is probably a time to be aware and alert, not complacent!" It is important to recognize periods of high risk before problems occur, not after.

Bonds - Bond yields continue to rise after the long-term oscillator issued a buy signal for bonds. However, the signal still stands.

Commodities - The long term oscillators are positive for gold and silver, and cautionary for equities and oil. The hype and media attention that oil received as it reached record high pales with the attention the TSX received when it closed over 15,000. That is why the risk could be greater for oil then equities.

Currencies - Indicators suggest that the CAD$ is stronger than the US$, but that the US$ is stronger than the euro. The euro seems to be stronger than the yen.

Catch the trend.

US equities are relieving their overbought condition. When the oscillators reach the high, overbought level and decline, it suggests a pause or a decline. As you can see the the past, markets often continue to rise when this occurs shortly after a market low.

The long-term trend indicators for the US markets are still green, suggesting that, so far, this is just a normal pause.

The long-tern oscillator for the TSX is also declining from the overbought level, suggesting that this is a pause in the up trend.

The long-term trend chart is still very positive for the TSX. The TSX had a steep advance and was due for a rest. It would have to decline sharply to turn red.

The long-term trend chart for the Volatility Index turned red (or positive in the case of the VIX Index) two months ago. It still indicates that the risk is less now than it was for most of 2007 and early 2008.

The long-term oscillator for the US Financial Services Index is making higher highs as these stocks retest their lows. This suggests that the lows will hold. When this turns up again, it will indicate that the financials are ready to start another up trend.

While the US Financial Indexes are not close to turning green, the long-term trend indicator for the TSX Financial Index has turned positive by turning green for the first time since last fall. Look back to 2003 and see how accurate this was in determining the long-term trends.

The long-term oscillators for bonds bottomed and turned up, giving a buy signal on May 20. Bond prices have not risen yet. Sometimes there is a double bottom. It suggests that prices will be higher (and yields lower) three to six months from now.

On May 19, 2008, the long-term oscillators for gold and silver turned up from oversold levels for the first time since last summer. It still indicates that these precious metals should be starting a new up trend even though prices are volatile. The up trend took a while to get going last year too!

The long-term oscillator for oil indicates that the price should continue to consolidate or decline until this oscillator turns up again.

This suggests that the CAD$ is still in an up trend versus the US$.

Until this long-term oscillator peaks and turns down, the odds are that the US$ will be stronger than the euro.

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