AFTER A STAGGERING 41% RALLY IN SIX TRADING DAYS, THE US BANKING INDEX IS DUE TO CORRECT FOR ANOTHER WEEK OR SO BEFORE RESUMING THE UP TREND. THE OSCILLATORS FOR MOST ALL GLOBAL MARKETS HAVE TURNED UP TOO. INDICATORS SUGGEST THAT GOLD HAS JOINED OIL'S DOWN TREND.

After dragging equity markets around the world lower for over almost two months, the US Banking Index, which is at the epicenter of the current financial crises, rose a staggering 41% from the close on July 15 to the close of July 23. For a major sector of the markets to have such a significant advance in a short time is almost unheard of. This helped to turn around equity markets all over the globe. As of this morning, the long-term  oscillators had turned up for 28 out of the 30 global market averages I looked at. The two exceptions were Canada and Brazil, two resource markets that are extremely oversold and likely to turn up in a week or so. For the US financials to correct by losing at least one-third of its gain during this week after a straight-up advance would only be normal. As of this morning the US Banking Index is down 10% from the July 23 close. This is likely to cause weakness for equity markets in the very short term. However, since the long-term oscillators turned up from an extremely oversold level on July 21, it indicates that the up trend should resume soon and should last at least until the middle of August. The strength shown by the markets during this rise will help us to determine whether this is just another bear market rally similar to the rallies that began in January and March 2008, or a turnaround of longer-term significance.

Oil continues to weaken and the long-term oscillators for gold and gold stocks have turned negative. The price of gold did not rise above $1,000 in this latest rally like it did during the March low in equities. Making a lower high like gold did is not usually a good sign. On the other hand, the long-term oscillator for oil stocks could turn up anytime since we are told that current valuations of oil stocks are based on oil price of $90 a barrel, which is still well below the current price of $125. Therefore, it is possible for oil stocks to follow the equity markets instead of the price of oil as happened on Friday, July 25. The long-term oscillator for oil stocks is very oversold and could turn up anytime, whereas the oscillator for gold stocks is not.

The last spike in oil prices may have been due to SemGroup having to cover short positions. Last week SemGroup filed for bankruptcy after losing $3.2 billion in oil futures and derivatives. Many firms use PhD's in mathematics to create complex formulas to trade securities. These work most of the time, but during extreme movements they often fail. As an experienced analyst said, "A six food person can still drown trying to cross a river that is an average of five feet deep." It always amazes me when I hear of losses in the billions in securities where the big time money managers have taken on huge positions that go against the indicators you see here. Shorting oil before that was a fool's game. Unfortunately SemGroup and their creditors paid a high price for it.

We are still witnessing the highest level of pessimism since 1994 and insiders are buying heavily just like they were at the market lows in August 2007, January 2008, and March 2008. These are positive signs, at least for the short-term. Don't be too concerned about market volatility this week. Stay tuned for further information on the internal indicators for the markets that will provide guidance for the longer-term.

Bonds - Yields seem to be peaking in a narrow trading range.

Commodities - See comments on gold and oil above and in the charts below.

Currencies - The US$ seems to be stronger against the CAD$ and the Euro within a tight trading range. The euro is still strong versus the yen.

The long-term oscillators for almost all other equity markets in the world look like this chart for the SP 500 - turning up from an extremely oversold position. V-bottoms are normal for this indicator.

The big move by the US Banking Index is very obvious here. The long-term oscillator is still moving higher in spite of the recent correction suggesting that there is more time for potential gains here. This should lead other equities higher. Last week headlines read, "Bank investors completely ignore bad news." That shouldn't surprise us since the oscillators showed us that the worst-case scenario had been factored in.

The Volatility Index has peaked at a lower level than it did in previous corrections, which is positive. The long-term oscillator has peaked at a very high level and has turned down. This supports what the other indicators are suggesting - the worst should be over a while anyway.

The only two global markets out of 30 that I looked at where the long-term oscillators have not turned up yet are Brazil and Canada. The long-term oscillator for Brazil looks just like this chart of the TSX. They are very oversold and at levels where they have typically turned up in the past. They normally lag in the US markets by a week or so.

Bond yields did not fall as low in this equity correction as they did in March. This is a positive sign for the longer term.

The long-term oscillator for gold has peaked and turned down after a weak rally. Risk of a correction has now increased for gold and silver and precious metal equities.

Oil still appears to be in a down trend and has more time or decline to go before reaching the fully oversold level, if that is where it is going.

While oil prices are not oversold, oil stocks are. They could turn up in a week or so. This would help the TSX along with strength in the banks while weakness in gold stocks would hurt it.

The CAD$ remains in a narrow trading range versus the US$.

The euro is also in a narrow trading range with the euro. The indicator suggest that the US$ has entered a period of strength compared to the euro.

The euro is still strong compared to the yen however.

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THE SPRING HAS SPRUNG! THE BIGGEST ONE DAY RISE EVER IN THE US FINANCIAL INDEXES CAUSE LONG-TERM OSCILLATORS FOR US MARKETS TO TURN UP. CORRECTION HAS LIKELY ENEDED AND EQUITIES SHOULD RALLY FOR AT LEAST A MONTH. WHAT HAPPENS AFTER THAT IS STILL UNCERTAIN.

In previous updates I have described the oversold stock markets as a spring that has been compressed as far as it can go. When the pressure from a compressed spring is released, it bounces back quickly and significantly. The weekend announcement of the US government's bailouts of Fannie Mae and Freddie Mac on July 13 did not have the desired positive impact on equity prices during Monday's and Tuesday's trading. However, on Wednesday, the news that Wells Fargo earned more than expected and raised its dividend made investors realize that not all financial corporations were mismanaged and in dire straits. When this reduced the selling pressure, the financials rebounded so much that it produced the biggest one-day rise even in the 19-year history of trading for the US Banking Index with a gain of 12.3%. The spring has sprung. This in turn helped to turn stocks in other sectors around too. The long-term oscillators for US equity markets had been declining since June, but last week's strength enabled them to turn up from the extremely oversold level they had reached. When this occurs, it implies that the selling has reached a climax and that buyers are keen to take advantage of the low prices. There have been occasions during the 2000 - 2003 bear market where there were strong three day rises, only to be followed by further declines. The different between these occasions and this one is that the long-term oscillators have turned up, whereas, in the previous false rallies they did not. Moreover, the long-term oscillator for the Volatility Index has turned down from a peak as it has at other significant market lows over the last five to eight years. When these indicators all move at the same time, they are usually quite accurate.

Is this correction that began last summer over? It is too early to tell. During the last bear market, the long-term oscillators for equity markets turned up from oversold levels in January 2001, April 2001, October 2001, July 2002, October 2002, and March 2003. Equities had a powerful rally with in the longer-term bear market every time until the real bull market finally emerged after March 2003. The shortest rally lasted four weeks in January 2001 and the longest lasts months after October 2001. Therefore, equity markets should rise for at least four weeks to the middle of August. By then, there should be enough data to determine if this rally has been stronger than the others or if this is just another short-term rebound in a prolonged decline. On the other hand, if the TSX rises to another new high, it could show us that the US markets are in a longer-term bear market while the TSX is a in a longer-term bull market. Time will tell.

Bonds - Bond yields are rising, confirming the indications that the risk in equities is subsiding, however, the long-term oscillators have not turned down yet.

Commodities - The long-term oscillators for gold and silver are still rising, while the same indicators for oil and natural gas are finally declining in a more meaningful way. This is also a positive development for equity markets. Please see last week's special update on energy for further information.

Currencies - There is no change from last week in currency trends. The CAD$ and euro are stronger than the US$ and the euro is stronger than the yen as these currencies seem to stay in a narrow trading range.

The long-term oscillators for US market averages have finally turned up fro the most oversold level it has reached in years. Markets dropped to lower lows than March this time. Markets should rally to higher highs if this corrective phase is over for the longer term.

The Volatility Index peaks when equity markets bottom. The long-term oscillator has turned down for the first time since May after going as high as it has at the end of other important market corrections.

You can see that, after a sharp, heavy duty sell-off, the US Banking Index had a powerful upside reversal last week. Since the US financials have been at the epicenter of this crises, they should lead markets higher now, just as they lead them lower before this.

The same pattern is exhibited with the US Financial Services Index, which is made up of investment and insurance companies.

The long-term oscillator for the TSX has not turned up yet, but should do so soon to follow what is happening to the south of the border. It is almost as oversold as the SP 500 even though it only dropped half as much.

The long-term oscillator for gold is still rising but gold has not surpassed the $1,000 level like it did when equities bottomed in March. We must be alert for any change here.

Oil finally had a meaningful decline last week, which undoubtedly helped US equities. Perhaps investors were using oil as a safe haven instead of cash of gold.

The long-term oscillator for US homebuilding stocks has also turned up suggestion that these stocks could rally for at least a month or so. To be safe, short sales should be covered for the time being.

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INDICATORS SUGGEST OIL IS PEAKING AND EQUITIES BOTTOMING

After a long, historic rally in oil, the short term Trend chart has finally turned red for the first time in 3 ½ months. I have been warning that this could happen ever since oil rose over $120. Today, oil closed at $129.29. Waiting for this to turn red before selling or selling short has proven to be helpful. Oil prices are now at risk of declining for the short term.

Oil is so due to correct since staying green since early 2007. When this long-term chart turns red, oil will be at risk of being in a longer-term downtrend. See how profitable and easy it is to use these signals.

Oil has not been oversold in the long term since early 2008, and before that in early 2007. Oil can be weak for a long time before becoming oversold again. It would make sense for oil to peak as equities bottom, which appears to be happening with yesterday’s biggest one-day rise ever in the US Banking Index of 12.3%!

This chart was shown in the July 14 Investment Update after it had just turned red for the first time since the beginning of 2008. It provided a clue that the bloom was coming off the ‘energy rose.’ You can see how easy and profitable it would have been to go long when this turned green and sell when it turned red.

Natural gas prices almost doubled since this long-term chart turned green last September. When this turns red it will be more negative because it means the longer-term trend will have turned down too.

The longer term oscillators for the US market averages are finally beginning to turn up from extremely oversold levels. Monday’s Investment Update will offer more confirmation if equities have indeed bottomed.

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