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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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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