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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