THE PASSAGE OF TIME, THE LEVEL OF PESSIMISM AND LONG TERM OSCILLATORS SUGGEST THAT A BOTTOM IS APPROACHING FOR THE DJIA AND SP 500 AS THEY TRADE NEAR BEAR MARKET TERRITORY. THOSE WHO FOLLOWED THE ADVICE GIVEN HERE TO INVEST IN CANADA HAVE HAD A MUCH MORE POSITIVE EXPERIENCE.

As of Friday's close, the DJIA was down 19.8% from the 2007 high (a 20% decline officially qualifies as a bear market) and the SP 500 was not fairing much better. In the meantime, the S&P/TSX Index was down only 1.8% from it's 2007 high and down 4.8% from the new record high reached last month. The first two updates this year entitled "The Big Picture Part one and Part Two" gave the rational for investing in Canada, since the 16 to 20-year cycle that favored the US in the 1980's and 1990's had ended in 2002, and was now favoring Canada. For this reason, I ignored the conventional wisdom of investing in US and international investments, and recommended in the US and Canada during the last year is further confirmation of the powerful impact of these long-term cycles and how important it is to invest along with them, instead of against them.

The decline in the DJIA and SP 500 (the DJT, DJU, NASDAQ, and Russell 2000 have held up much better than the DJIA and SP500) along with all the negative news, has once again raised the level of pessimism close to the high levels where markets have bottomed in the past 10 years (refer to the Investors Intelligence chart below). Markets typically correct six to seven weeks after a high and we re right in that time frame right now, considering that the markets peaked around May 17. Moreover, the long-term oscillators for the SP500 and especially the DJIA have now declined to the fully oversold level (0.2 on the left-hand scale). When this occurs, it indicates that the worst-case scenario has been factored into current prices so that prices probe their lows. It also suggests that prices are so low that they can be compared to a spring that has been compressed so much that it cannot go down anymore. When the selling pressure is reduced from this extreme, stocks rebound in a major way just as a spring rebounds quickly and violently when the pressure is released after it has been fully compressed. Many major portfolio managers take the summer off. Much of the selling they wanted to do could be completed by now. While human emotions make us feel that things seem like they are about to get much worse, the indicators suggest that investments could perform much better in the near future. How can we have confidence in this?

One year ago, before the sub-prime problems became a major concern, the headline of the July 2, 2007 update stated, "Use strength to take profits and reduce equity exposure." The TSX peaked almost three weeks later on July 20 before dropping to an August low.

In a special update published a few weeks ago, I illustrated how a rise of 80% or more in oil prices in one year caused bear market declines in the past. It appears to have been accurate once again fro the DJIA and SP 500 anyway. A decline in oil prices may likely be the catalyst for a market rebound. I will continue to do my best to keep you informed. In the meantime, let us be thankful for the opportunities and the quality of life we can enjoy in Canada!

Bonds - The long-term oscillator has once again given a buy signal after giving one a few weeks ago aborting it. Does lower bond yields imply that there will be another flight to quality as equities are under duress or does it mean that lower yields will make stocks more attractive? Only time will tell.

Commodities - The long-term oscillators turned up for gold and silver many weeks ago giving a buy signal, but it seems as though they were having difficulty establishing an up trend. Last week the prices rose and the oscillator continued its up trend suggesting that gold and silver prices (along with gold and silver equities) are still likely to move higher. The long-term suggesting that oil could be in a topping process for weeks now, ever since the price rose over $120 per barrel. Anything can happen at this stage of a long sharp price rise but the risk of a decline is likely very, very high. We will have to let time and market forces do their work here.

Currencies - The CAD$ still seems weak compared to the US$. However, after mentioning last week that the euro had reached the overbought range versus the yen, the long-term oscillators suggest that the euro may have some sort of peak versus the yen and bottomed compared to the US$.

The long-term oscillator for the SP 500 is close to the 0.2 level on the left-hand scale which means that it is now in a fully oversold territory where lows have occurred before. It could still take another week or so to go a little lower before turning up.

There are now 5% more bears than bulls which has only happened four times in the last ten years (during the 1998 Clinton impeachment/long-term capital crisis, after 9/11, at the bear market low in October 2002, and at the March 2008 lows). This suggests that prices are about as depressed as they get and close to a turn.

The long-term oscillator for the Dow Jones Industrial Average is very oversold, only having gone this low once before during the last five years in 2005.

The long-term oscillators for the TSX, NASDAQ, Russell 2000, DJ Transports and Utilities Indexes are not nearly as oversold as the DJIA and SP 500, which is positive. It suggests that many stocks are performing much better than they did in March when the DJIA and SP 500 traded at these levels.

The long-term oscillator has once again turned up from a low suggesting that bond yields should decline while prices rise.

The long-term oscillator for copper has turned up after correcting for several months.

The long-term oscillators for gold, silver, gold stocks, and silver stocks all look like this. This suggests that the rally finally has some strength behind it after indecisive action for several weeks.

The price of oil moves higher while the long-term oscillator makes lower highs. This is usually a sign of weakness before a decline, but it has been going for a long time with oil.

The price of natural gas and the long-term oscillator continue to make higher highs, which is different than the scenario for oil.

The long-term oscillator for the euro vs. the US$ has turned up, suggesting that the euro should make gains against the US$. The euro may have reached a short-term peak compared to the yen as carry trade positions are reduced due to weakness in equities.

Data supplied by

US MARKETS CORRECT AS FINANCIALS CONTINUE TO WEAKEN, WHILE S&P/TSX CONSOLIDATES NEAR RECORD HIGHS.

THE COMMON BELIEF IS THAT IT IS IMPOSSIBLE TO TIME THE MARKETS. IT WAS ALSO A COMMON BELIEF THAT A NORMAL PERSON COULD NOT SWIM 3.8 KM (2.4 MILES), CYCLE 180 KM (112 MILES) AND RUN 42.2 KM (26.2 MILES) IN ONE DAY. SEE BELOW.

It is normal to have a six to seven week correction after a strong rise and that is what I believe is happening now. There seems to be announcement of more serious problems with the US financial firms everyday, leading to new lows in the US Banking Index and a retest of the lows in the US Financial Services Index. In the meantime, the TSX is holding within a few percent of its all-time high as the resources are strong and the banks here hold up relatively well. This corrective process could end by early July. As mentioned before, the deeply oversold characteristics of the market would imply that the downside risk is low while the upside potential when this is over, is high.

This is a short comment as I completed an Ironman Triathlon in Coeur D'Alene, Idaho yesterday. While it is impossible to time the market all of the time, it is possible to be successful quite often. I will continue to use the same discipline, perseverance and determination that it takes to train for an Ironman in my quest to time the market successfully as much as is possible.

There is no change for bonds and currencies from the previous week. However, the oscillators for gold and silver are pausing in the up trend.

Oscillators are getting closer to the fully oversold level for US markets.

Volatility is not nearly as high as it was in August 2007, and January and March 2008. The oscillator is still rising, confirming that the correction is not over yet.

IYG is testing the low along with the oscillator.

Bonds are holding near the lows along with the oscillator.

The long-term oscillator for gold (the chart for silver is identical) has turned down without making much progress on the upside. As you can see, this is very rare. Gold and silver have been extremely volatile in the last month. As mentioned last week, be prudent rather than aggressive in this sector.

The long-term oscillator for oil is moving lower as the price of oil moves higher. This is usually a sign of weakness.

The CAD$ is weak versus the US$.

The euro is still weak versus the US$.

The euro is still strong versus the yen but is in the overbought level. However, this does not mean that it will decline. The oscillators are much more accurate at the lows than the tops.

Data supplied by

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