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Bulls Zen Bears

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    D. Harder is a contributor to Trading Post's trading newsletter, Bulls Zen Bears, providing experienced up-to-date market observations.

    Harder has over 25 years experience as an investment professional with Canada's leading financial firm. He is a member of the Canadian Society of Technical Analysts and the International Federation of Technical Analysts, and is a Fellow of the Canadian Securities Institute.

August 2008

Volume I, Issue 35

Tuesday, August 26, 2008
LONG TERM OSCILLATORS INDICATE THAT THE TSX AND ENERGY STOCKS HAVE STARTED AN UP TREND WHILE GOLD, GOLD STOCKS, FERTILIZER STOCKS AND OIL ARE BOTTOMING IS THIS THE END OF THE YEAR LONG CORRECTION?

After a strong rally following the collapse of Bear Stearns on March 17, US equity markets started to decline on May 20. While the SP 500 Index is still well below the highs reached in 2000, strength in commodity prices and the resource sector enabled the TSX to outperform most global markets for six years so even now it is 17% higher than the 2000 high. After the TSX reached an all-time record high three weeks after May 20, (at 15,155 which was 33% above the 2000 TSX high) on June 6, weakness in global economies and an end to the speculative frenzy in oil resulted in lower prices for commodities and resource stocks. The TSX (the same goes for any other major equity market) corrected, since it cannot go in a direction opposite to the trend of the powerful US markets very long without eventually following the same path. The SP 500 bottomed along with financials on July 15 but has not made much progress since. As US markets turned around, weakness in the resource sector caused the TSX to drift lower for another month before finally bottoming last week. I cannot remember the last time that it took this long for the TSX to turn up after the US markets. While the blue chip indexes in the US made lower lows in January, March and July of this year, the trading range of the TSX has made higher lows and higher highs. Time will tell if the rise that began last week will take the TSX to even higher highs than it reached two months ago.

These updates reported that US equities are bottoming while oil was peaking on July 17. Since Aug. 11, they have been forecasting that the TSX should be bottoming too. Last week the TSX rose 2.7% as gold and oil prices had significant increases from very oversold levels. The long-term oscillators for the TSX and the TSX Energy Index have turned up from very oversold levels giving a buy signal. This implies an up trend lasting anywhere from one to six months. The long-term oscillators for gold, gold stocks, fertilizer stocks (potash is a big weight in the TSX Index), are bottoming and should turn up with any additional strength this week.

The strength in US equities since the July 15 low has not been inspiring. At this time, any objective technical expert would have to conclude that this is just a rally in a longer-term downtrend for US equities. If this is the case, it may be prudent to sell equities and move into cash after a rise in the months ahead, especially if the TSX makes record highs while the SP 500 makes slow progress. US markets often perform well in the fall of an election, which occurs this year on Nov. 4. One can usually get a better idea of the market direction a week or so past Labor Day, after senior portfolio managers return from summer holidays and have a chance to assess things.

These are challenging times. There are reports that many hedge funds have performed poorly because they were short financials and long energy companies, a strategy that below up when US financial stocks spiked 40% last month and energy stocks fell into last week. The indicators and the advice provided in these updates would likely have enabled money managers to avoid a large portion of those losses. I will continue to do my best to use all the meaningful information (much of it is useless) to provide helpful and profitable advice for you in the weeks ahead.

Bonds - Bond prices reached a lower high during this equity correction compared to the March correction. This is not positive for bonds.

Commodities - Gold and oil prices likely bottomed last week.

Currencies - The CAD appears to have made a low versus the USD, and the euro is still in a downtrend compared to the USD and the yen.

 

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The long-term oscillators for US market averages are still rising.

 

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The long-term oscillators for the US financial sectors are still rising in spite of the consolidation phase that they have experienced for several weeks. Another spurt to the upside here would make things clearer for the overall market direction.

 

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The long-term oscillator for the TSX finally turned up from the most oversold level in years after the index rose 2.7% last week. The markets should rise from here for a while even if we are embroiled in a longer-term downtrend in the US.

 

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The long-term oscillator for gold stocks appears to be ready to turn up after last week's strong rebound in gold prices. This bodes well for gold stocks and the TSX.

 

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Unlike the TSX Gold Index, the long-term oscillator for the TSX Energy Index has turned up from the low and the short-term trend chart you see here has turned green. This confirms what the oscillator has predicted. It was very accurate when it turned red in June, as it has been on previous occasions, as you can see.

 

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Price for 10-year GOC bonds matched the March highs, while their US counterpart did not. The best time to buy any asset is when the long-term oscillators are at a low, not the high. The direction of bond prices from here is not very clear. It seems as though the risk is higher now than it was two months ago.

 

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Gold is as oversold as it has been every other time that it has bottomed since 2004. While it has likely bottomed, the oscillator needs to turn up to forecast an up trend.

 

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Oil is also very oversold and bottoming. After last week's bounce in oil prices, it appears on the verge of turning up, just like gold.

 

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The CAD got a boost from oil prices and the oscillator turned up to suggest that some sort of low is in place.

 

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After a sharp drop in recent weeks, the euro is very oversold versus the USD, but the oscillator has not turned up yet.

 

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The euro also dropped compared to the yen. This decline could be more severe or just last longer before rising, since the oscillator is not in the fully oversold level yet.

 

Data supplied by

Posted by TPFS Communications in Bulls Zen Bears at 10:16

Volume I, Issue 34

Tuesday, August 19, 2008
COMMODITIES AND THE EURO CORRECT AS THE US DOLLARS IS IN VOGUE AGAIN AFTER A LONG BEAR MARKET. IT LOOKS LIKE THE TSX, AND NOW GOLD AND OIL, CAN TURN UP ANYTIME.

The value of the US dollar increased during the 1980's and 1990's as the Americans won the Cold War and gained global superiority in many way, culminating with the technology achievements in 2000. Due to overvaluation, a peak in optimism and a host of new problems for the US, the greenback has been in a steady decline for most of this decade. While much of the increase in the value of commodities has been due to the rapid growth in China and a shortage of supply, part of the increase in prices is due to the fact that most all commodities are priced in US dollars. As the US dollar falls, commodity prices rise. The current financial crisis emanating from the good old USA caused even more funds to flee from the US dollar and move into the euro, oil and gold in recent months, to the point where the euro and oil were grossly overvalued.

The special update on energy which I wrote on July 18 forecast that energy prices were peaking, with oil prices at $130 a barrel. Oil closed at $114 on Friday. The headline in the July 18 update stated that "Indicators suggest that gold has joined oil's downtrend" when it was trading at $928. In the following three weeks, gold has experienced a precipitous decline, falling below $800 to close at $792 an ounce on Aug. 15, a hefty loss of 14.6% in only three weeks. After commenting that the Canadian dollar and euro were stronger than the US$ for quite some time, the currency comment in the July 29 update stated that the US$ seems to be stronger than the CAD and the euro in a tight trading range. The currency comment on Aug. 5 reported that "the euro may have finally peaked after a long up trend versus the yen." The indicators are usually accurate in forecasting what should happen, but they do not explain why things will happen. It was, therefore, very interesting to see that the indicators were extremely accurate for gold and oil, as prices for oil and gold would usually rise after an event like this in a region with major energy pipelines. This time they fell.

There are certainly economic and financial challenges in the US, but at least they have been dealing with them. In the last month or so, investors have come to realize that Europe seems to be following the US since it is now facing similar economic problems. The recent invasion by Russia caused a sudden shift in sentiment as investors all of a sudden realized that Europe has some problems that the US does not have. What seems like just a normal move within a trading range may have turned into a major trend change for the overvalued euro. Some of the money that moved into commodities and resource stocks when the US dollar was weak has returned to the greenback for the time being. Even though it may seem insignificant, I include comments for bonds and currencies in these reports because they can have a major impact for investments at certain times.

After being weak during the first half of August, the long-term oscillators for the TSX Index, the Dow Jones Utility Index, gold and oil are very low and oversold which indicates that prices have now declined enough to have factored in the worst case scenario. This usually happens just before prices bottom and rise again. Stay tuned for more market action!

Bonds - The outlook for bonds is mixed. See chart of the 10-year GOC bond for more information.

Currencies - The euro could still fall further. The CAD is close to being fully oversold versus the US$.

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The long-term oscillators for all the US market averages are still rising off of a very oversold level reached three weeks ago.

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Similar to the US financials, the trend of the DJ Utility Index can have major implication for US stocks. The long-term oscillator for the DJ Utility Index is very oversold and ready to rise. The DJU often leads the markets so a reversal to an up trend here could add some much needed strength to this move.

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The TSX lost 1.8% last week even though it appeared poised to turn up during the week. Now that gold and oil stocks are also fully oversold, perhaps we can have a lift-off soon.

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You can see that the oscillator for the TSX Energy Index is already bottoming. An up trend, or at least a period of stability could being any day.

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The long-term oscillator for gold stocks is also extremely oversold. You can see that gold stocks have always had a sharp rebound for at least a month when the oscillator has turned up from these levels since 2004.

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Ten year GOC Bonds are approaching the highs that they reached during the Bear Stearns collapse in March. Since the TSX seems like it is bottoming, bond prices could decline if the TSX starts a convincing up trend from here.

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The long-term oscillator for gold is now very close to the oversold levels that have marked the lows of other corrections since 2004. However, it is possible that there could still be another week or two of volatility before an up trend or period of stability begins.

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After selling off for two months, oil is now extremely oversold. A rise or a period of stability could begin anytime. This indicator has been very reliable.

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The short-term trend chart has been very accurate for gold, especially when used together with the long-term oscillators.

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The CAD$ is in the fully oversold region and has stabilized here but has not turned up yet.

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The euro vs. USD$ has turned red for the first time since 2006. The long-term oscillators for the euro are not in the oversold area yet.

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The euro vs. yen fell sharply since turning red on the short-term trend chart two weeks ago. The euro is not fully oversold here either.

Data supplied by

Posted by TPFS Communications in Bulls Zen Bears at 10:47

Volume I, Issue 33

Monday, August 11, 2008
IN THE ROLLER COASTER RIDE OF THE EQUITY MARKETS, THE US MARKETS ARE IN THE LEAD CAR CLIMBING THE HILL PULLING OTHER MARKETS HIGHER. THE TSX IS IN THE LAST CAR APPROACHING THE LOW AS GOLD AND OIL PRICES PLUMMET.

The long-term oscillators for the US equity markets turned up on July 21 when the headline for the update said that the "SPRING HAD SPRUNG." So far, after three weeks of volatile trading, those oscillators have indeed been accurate in pinpointing the end of the decline that started in May for most global markets. While the SP 500 is up 2.8% since July 21, the TSX has declined 1.3% (both figures as of Friday's close) as falling commodity prices hurt the resource sectors that had been strong for so long. On July 18 a special update showed that oil prices should decline and last week's headline stated that "INDICATORS SUGGEST THAT GOLD HAS JOIN OIL'S DOWNTREND." Last week gold prices fell 6.6% from $897 to $852 and oil prices continued to fall, losing $10, or 2.9% as prices fell from $125 to $115. A month ago, some of the analysts at major New York investment dealers said that oil prices were going to be at $170 by now. After the prices often move in the opposite direction. This happened with US real estate, with the Canadian dollar after it reached par with the US dollar last fall and has happened again with oil prices.

According to Stephen Leeb's strategy for oil, (in the June 10, 2008 special update for oil) equities should be sold when oil prices rise more than 80% in one year, (which happened when oil rose above $125 per barrel) and bought when they have risen than 20% in twelve months. For oil prices to be up only 20% in the last twelve months, oil would have to fall to $89 this month, to $98 in September, $110 in October or trade at $118 in November. At today's price of $115, oil prices are now up only 20% for the calendar year. The decline in oil from the peak of $146 on July 11, is very positive for world economies, even those that are net exporters. Rapid, huge changes in prices for any product usually ends up being a negative for all concerned.

The SP 500 rose 2.8% last week while the TSX lost 1.1%. As was mentioned last week, as long as the US markets are in an up trend, the TSX and other global markets just about always follows along in due course. The long term trend charts have turned positive for the US Small Cap market averages and the Volatility Index. This still needs to happen for the SP 500, DJIA and the Banking Index to indicate that this is not merely a bear market rally. The TSX is lagging behind due to the heavy resource exposure but the long-term oscillator appears poised to turn up this week which means that the gold and oil stocks could be near a low, even if commodity prices continue to lose ground.

Bonds - Prices continue to stay in a narrow range.

Commodities - Gold and oil prices are into the oversold range but could still decline more.

Currencies - The long-term oscillators for the US$ turned up on July 28. Since that time, the US$ has been very strong compared to the CAD$ and the euro. Last week, I mentioned that the long-term oscillator for the euro indicated that it may have finally peaked against the yen. That was confirmed as the euro lost more ground last week.

 

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The SP 500 will have to rise another 2% or so for the long-term trend chart to turn green/positive which will reduce the changes of this being a bear market rally.

 

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The long-term trend charts for the US Small Cap stocks have turned green/positive.

 

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The US Banking and US Financial Services Indexes have been red/negative for over a year now. If these trend charts would turn green, it would indicate a significant improvement compared to other rallies.

 

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The trend chart of the Volatility Index has turned red for only the second time in a year and a half. In this case, turning red is positive for equities since it indicates that volatility is in a down trend. Peaks in volatility happen to market bottoms. Notice that volatility was less this time than the previous four occasions.

 

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The long-term oscillator for the TSX is curving at the very oversold level. This often happens just before it turns up. Hopefully this week will mark the low for the TSX before it follow the SP 500 higher.

 

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The long-term oscillator for gold stocks are now in the fully oversold range but still need to turn up before the coast is clearer.

 

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Energy stock are very oversold so they can turn up anytime as well. Moves at this stage can be very volatile with big down moves eventually followed by major advances.

 

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Bonds are in a narrow trading range with the oscillator in the middle of the overbought-oversold range.

 

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The long-term oscillator for gold is still not in the fully oversold range where lows have occurred before. This implies that gold could decline further or that it could take longer gold prices will hit bottom and turn up.

 

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The oscillator for oil is in the fully oversold range. While it could still take longer before it turns up, like it did in late 2005 and 2006, it is in the range where it has turned up many times before.

 

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Gold has turned red/negative for the long-term.

 

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It would not take much to turn the trend chart for oil red either. It has been green since early 2007 when the price was close to $60 before the long up trend started.

 

Data supplied by

Posted by TPFS Communications in Bulls Zen Bears at 15:50
(Page 1 of 2, totaling 4 entries) » next page

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