MANY INDICATORS SUGGEST THAT EQUITIES CAN BOTTOM ANY DAY NOW. THE TSX SUCCUMBS TO US WEAKNESS. WHEN TO SHORT OIL.

The long-term oscillators for the SP 500 and Dow Jones Industrial Average are now as low as they have been in the last five years. Last week, US Advisory Sentiment was as bearish as it was on Mar. 13, 2008 and the three other occasions that equity markets bottomed during the last ten years. (Lows occurred October 1998, October 2001, and October 2002.) Moreover, insider buying has surged and the long-term oscillator for the US Banking Index seems to be showing preliminary signs of a low too. Today is seven weeks (short-term corrections usually last for six to seven weeks) to the day that the US markets hit a recent high on May 19. While market strategists reduce equity weightings and more and more investment experts turn negative on equities, a host of indicators suggest that conditions are finally ripe for a bottom to occur at any time. In other words, the "spring" has been compressed about as low as it can go. When the pressure is released from a compressed spring, it snaps back quickly and violently. Market lows are often marked by extreme volatility, so it could be a wild ride in the short-term. However, when everyone that wants to sell has sold, and the selling pressure reduced, the same volatility should be experienced on the upside.

Las week the S&P/TSX succumbed to weakness in global equities by losing 2.4%, as US markets declined 1.2% into bear market territory and new lows for 2008. However, at Friday's close of 14,010, the TSX is still well above the Jan. 22, 2008 low of 12,012 and the Mar. 20, 2008 low of 12,454. Weakness in the US financials and the negative impact of high oil prices seem to be the main problems. The long-term oscillator for the US Banking Index is showing signs of a turn around from extreme lows even as it fell another 5% to a record low today. Time will tell if there will finally be some stability in that depressed sector. It seems like oil prices have risen just as far and fast as the US financials have fallen. In the June 10, 2008 special update, I pointed out how an 80% rise in oil prices during the last 12 months has produced bear markets in the past. It has been accurate once again for the US markets anyway. (The SP 500 is down 7.8% since June 10 and the TSX is down 6.9%.) Eighty percent above last July's price is $133. In the past, oil prices had to fall to only be 20% higher for the year, which would mean that oil prices would have to decline to $89 per barrel for equities to improve. Oil prices seem to be defying gravity by rising continuously. Equity investors do not believe that this can be sustained since Canadian oil stocks are down approximately 10% from their highs. The first sign that oil prices have peaked will be when the short-term trend charts turns red. Riding the roller coasters at amusement parks is a summer activity. Hang on for the ride!

Bonds - Bond prices are stable, suggesting that there is not a major flight to safety during this period of market volatility. If there is a flight to safety, the money could be going into oil and gold instead.

Commodities - The indicators are still positive for gold and silver and gold and silver equities. Gold and silver should make new highs down the road to keep the longer-term up trend intact. The oscillators are neutral/overbought for oil and natural gas and negative for energy stocks.

Currencies - According to the long-term oscillators, the US$ appears to be consolidating and weakening compared to the CAD$ and the euro. Fluctuations are staying within the current trading range. The euro is still weaker compared to the yen.

The lower left scale reflects the current gloom and doom by showing that there are now 12% more pessimistic (bearish) investment advisors than optimistic (bullish) advisors. If you look at the green line of the SP 500 Index above, you will observe that when the black line has been this low before, the markets have always risen sharply. After a triple bottom in 2002 and 2003, the markets rose for five years. The SP 400 Index (green line, top right) could be in the process of making another triple bottom right now. Chart courtesy of Investors Intelligence.

The long-term oscillators for the SP 500 (shown here) and the DJIA are both extremely oversold at the lowest levels in five years. This is when markets usually bottom because the worst-case scenario has been factored into current prices. The next step is a turn to the upside.

The long-term trend charts for the US markets turned red (meaning increased risk) in early June while the TSX has remained green. TSX chart is included below.

The long-term oscillator for the Volatility Index has been this high once before since 2003 - at the August 2008 lows. This confirms that we could be close to a low, since volatility peaks at market bottoms.

The long-term oscillator for the TSX is not nearly as oversold as the US markets since it has been one of the best performing markets in the world in 2008.

The long-term trend chart for the TSX is still positive so far.

It is very interesting that the long-term oscillator for the US Banking Index may be bottoming, even though the Index was down another 3.7% today to a new low, very close to the low it reached at the bottom of the 1998 market low. What a collapse/decline in such a major sector! It would be hard to imagine the markets improving without this sector showing some strength or at least stability. This is a positive sign.

Bond prices have rallied but not nearly as high as they did three to six months ago when investors sold equities to buy bonds. On the other hand, investors could be buying oil and gold when equities suffer now, instead of bonds, since inflation is rising. The oscillator is still positive even though bonds are usually poor performers in a rising inflationary environment.

The long-term oscillators for gold and silver along with the corresponding equities are still rising and positive. Gold and silver are still below the peaks they reached in March when US equities were at the same levels as they are today. It may be positive for gold and silver if they cannot reach higher highs in the not too distant future. It could be positive for equities if bonds, gold, and silver did not reach new highs here.

When this chart for oil turns red, it will be the most obvious, initial sign that oil has finally peaked. This would be the time for aggressive investors who want to short oil to do it.

Even though oil prices are near their highs, energy stocks are about 10% from their highs. This implies that investors do not believe that oil prices can stay at these levels. The oscillators still suggest that further weakness is in store.

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