PLAY IT AGAIN, UNCLE SAM. US GOVERNMENT FORCED TO COME TO THE FINANCIAL RESCUE FOR THE SECOND TIME IN FOUR MONTHS. WILL THIS MARK THE LOW FOR THE MARKETS LIKE IT USUALLY DOES?

After arranging for the take over of Bear Stearns in March, the losses hanging over Fannie Mae and Freddie Mac (which own government guaranteed mortgages valued in the trillions) forced government to ensure that these companies can continue to do business. In addition, today the US Federal Deposit Insurance Corporation has come to the aid of depositors dealing with regional bank Indymac Bancorp, the biggest bank to fail since 1984. These events almost ensure that investor pessimism will increase even more, in spite of Advisory Sentiment (as reported by Investors Intelligence on July 9) reaching the highest level of bearishness since 1994. While equity investors in these companies could lose most of their capital, this is likely to be very positive for investors. In the Mar. 25, 2008 update, I wrote "Market lows have often been marked by the overwhelming emotions of fear and worry produced by the failure of a major corporation like Bear Stearns. Realize this and profit from it." US markets rose for two months after that as the TSX rose to all time record highs. While the US markets have lost all of those gains during the last month, the TSX is still 10% higher than it was at the Mar. 20 low. Investors and portfolio managers who understand market history (one understands it pretty well after studying it and being an investment professional for 27 years) and had the discipline/intestinal fortitude to make purchases in March benefited from it. Over the last 40 years, market bottoms have often occurred together with the demise of major US corporations. There is no reason why it should be any different this time. The clue that this is taking place will be given when the long-term oscillators for the US market averages turn up. This can happen at any time since the markets are extremely oversold.

Bonds - Although bond yields have risen due to the latest financial fears, yields are still well above where they are in March. As mentioned many times before, bonds are typically poor performers at this stage in the interest rate cycle.

Commodities - After a most erratic start, the up trend in gold and silver is becoming more clear. The long-term oscillators gave a buy signal for gold and silver and corresponding equities on May 19, as reported in the May 20, 2008 update. (May 19 was a holiday in Canada.) As of today, gold is at $974, which is up $67.50 or 7.4% since May 19, while the TSX Gold Index is at $91, up $7.36 or 8.8% since May 20. The US Silver Trust (SLV) is up $21 or 12.5% since May 20. The long-term oscillators have been accurate once again during a very challenging time. Will gold prices peak with a peak in pessimism like it did when gold hit $1,000 per ounce when Bear Stearns collapsed? Natural gas prices have dropped a little as oil prices hover at highs. See the oscillators shown below for indications of a change in the trend.

Currencies - The US$ is a little weaker compared to the euro and CAD$ but price movements are minimal, staying within a narrow trading range.

The latest chart from Investors Intelligence shows that there are now 20% more bears and bulls, the most pessimism since 1994. You can see that this level has moved markets higher in the last 10 years.

The US market averages are still red. The DJT and US small cap indexes were actually up last week.

The long-term oscillators for the SP 500 and DJIA are extremely oversold. Usually this makes a V-bottom. Turning up will indicate that the worst-case scenario has been factored into current prices, producing a rally.

The long-term trend chart for the TSX has also just turned red. However, since the long-term oscillators are so low, I believe it is prudent to stay invested. This could be similar to the way the indicator acted in the fall of 2006.

Even though the TSX has declined less than half as much as the SP 500, it is now in the oversold range that has produces strong rallies before.

In spite of the fact that the Volatility Index is well below the three peaks reached in the past twelve months, the long-term oscillator is matching the highest point, which was reached during the Aug. 16, 2007 low. Markets had a strong rise after the Aug. 16 low, peaking two months later on Oct. 12.

The trend in bond prices are still up (which will move yields lower).

Gold and silver prices were up and down like a yo-yo after the buy signal given here when this long-term oscillator turned up on May 19. However, the oscillator kept rising and did not waver. Viola, we have an up trend. How else could have forecasted this?

If gold does peak, this short-term trend chart should turn red.

When this short-term trend chart for oil turns red, it will be the first indication that oil prices may have peaked. It is easy to determine the trend (green is up, red is down) and very accurate, with very little whipsawing.

The short-term indicator for natural gas turned red last week. Will this impact oil? You can see how helpful and accurate it has been compared to any other investment tools.

The long term trend indicator for the CAD$ versus the US$ has also been very accurate in the past. Alan Greenspan said it is impossible to predict currency movements. What do you think?

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