OIL HOLDS GLOBAL ECONOMIES HOSTAGE. WHILE INTEREST RATES SEEM TO HAVE BOTTOMED, THE SAME CANNOT BE SAID OF THE US FINANCIALS.

Oil prices continue to hover at levels more than 80% higher than the same time last year. As explained in last week's special update, the 80% level is a level that usually causes problems for global economies and equity markets. Nonetheless, oil prices declined last week along with the S&P/TSX Index while US equities were mixed. Constant media attention, and a chorus of forecasts for much higher prices after a long, sharp rise are all signs typically seen at a peak in prices. Only time will tell if the analysts who are calling for prices to blast off to higher prices will be right, or if excessive optimism will result in market forces dragging prices lower, as all the investors who want to buy invest, leaving no one else left to push values any higher.

In the meantime, the central bankers of Europe, the US and Canada have suddenly changed their tune by emphasizing that they are now more concerned about rising inflation than the financial crisis and the economic slowdown it has produced. This means that we have likely seen the low in interest rates for this cycle. This is usually a negative development for equities, but, so far, investors seem to have taken this news in stride.

Equity markets seem to be having an orderly consolidation as attention is directed to the prices of oil and agricultural commodities. Few seem to have noticed that the US Banking Index (BKX) broke through the previous Mar. 17 low like a hot knife through butter that the US Financial Services Index (IYG) is now retesting the Mar. 17 low. If the IYG can hold within a few percent or so from the low, it will be very positive. If it, too, breaks through the March low it will be negative.

High oil prices, a collapse in US consumer confidence, and a change in the trend of interest rates, together with continues bleeding in US financial stocks would normally knock equity markets into a downward spiral. So why do the equity markets seem so resilient? Some statistics that monitor how money moves in and out of stocks show that equities are now as oversold as they have been at significant market lows in the past decade. Another example confirming this is the number of stocks that are trading above average. Last week, only 12% of US stocks were trading above their 10 week moving average. This figure rarely moves below 10%. When it does, it is usually a fabulous buying opportunity. While the long-term oscillators do not et indicate that equities are oversold, these other statistics provide evidence to suggest that most of the bad news seems to already be reflected in current prices.

In previous issues, I have pointed out the similarity between the action of the US markets now and the action in early 1991, just before a 20% rise in one month. The similarity continues. I do not know what would be the catalyst for a major advance in equities right now (other than a fall in oil prices), but it does seem as though market conditions are ripe for a sharp rise in equity prices when this consolidation is over, just as conditions are right for a decline in oil prices. These are indeed interesting times. I will continue to do my best to help you navigate through them.

Bonds - The long-term oscillator for bonds aborted the buy signal given earlier by turning down following a change in the focus of central bankers.

Commodities - Oil still seems overbought. Gold and silver are trying to rally, but weakness in oil prices could produce weakness in precious metals too. Be prudent, not aggressive.

Currencies - The US$ is showing strength against the CAD$ and euro. The euro still appears stronger than the yen.

Catch the trend.

P.S. I will be competing in my second Ironman Triathlon in Coeur D'Alene, Idaho all day on June 22, so next week's update will be brief.

The long-term oscillator for the SP 500 and other US market averages are still declining. The correction/consolidation will likely be over when this turns up. This could happen by the end of June, which would be six to seven weeks since the high in mid-May.

The long-term oscillator for the TSX is also declining after a sharp rally, taking the TSX to all-time record highs. A pause to refresh would be very normal. This suggests that more time or further decline is likely before a new up trend takes hold.

The oscillator for the US Banking Index is reaching rock bottom where sharp rises have occurred before in the spring of 2005 and early January 2008. This needs to turn up to indicate that the free-fall in this sector has paused at least temporarily.

While the chart above shows how the BKX broke below previous lows, you can see that the IYG is retesting the Mar. 17 lows. The long-term oscillator is till well above the lows reached in January and again in March. Sometimes this can indicate that the low will hold. See a similar situation in the euro vs yen chart in early 2008 below.

After turning up and giving a buy signal for bonds a few weeks ago, the oscillator turned back down again (as you can see, this is a rare event) after central bankers changed their tune to target inflation instead of slower growth. Bonds are still close to being very oversold.

The long-term oscillators for gold and silver are still rising from oversold levels while prices for the precious metals are whipsawed along with oil prices and the value of the US$. With the US$, oil and interest rates in a possible transition here, it would be prudent to be careful and cautious here until a clear trend asserts itself.

The long-term oscillator for oil has dipped slightly from a very overbought level as oil flirts with new highs once again today. The time to buy was when the oscillator turned up in February. I believe it is prudent to leave the last 10% of the profit to others who are willing to assume high risk.

The oscillator indicates that the US$ is now stronger than the CAD$. This would make sense given the change in the trend of US interest rates. However, Canadian interest rates were not lowered last week as was widely expected. Therefore, this move by the US$ may not last that long or be very strong.

The US$ still seems to be stronger than the euro too. As is the case with the CAD$, this may be more of a consolidation phase for the CAD$ and the euro, than the beginning of a major up trend for the US$.

The euro is still stronger than the yen according to this oscillator. Observe the double bottom in the oscillator during January and March of 2008. You can see that the low in the oscillator was higher in March than in January, even though the euro declined to the same level both times. In this case, it suggested that the euro was really stronger the second time, indicating that the low would hold, just like it does with IYG now.

Data supplied by