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.

Data supplied by