Volume I, Issue 47 | email: info@outperform.biz

BASEBUILDING STAGE WHOUDL BE ENDING BETWEEN NOW AND EARLY DECEMBER, FOLLOWED BY A MOVE TO THE UPSIDE. BEWARE OF NEGATIVE ECONOMIC NEWS AND FORECASTS. INDICATORS WILL SHOW US THE WAY.

Equity markets have been in a trading range since Oct. 10. The markets declined into the range of the Oct. 10 lows on Oct. 27 and again on Nov. 13 as interbank lending rates (Libor or TED Spread), the Volatility Index and the number of new lows have improved. For example, the number of shares making new lows on the New York Stock Exchange were 2,910 on Oct. 10, 1,125 on Oct. 27, and 776 on Nov. 13. The Dow Jones Utilities Index (DJU), which usually leads the markets, has also been in a steady rising trend since Oct. 10. When the considers these factors together with the extent of the decline, the high level of pessimism, a 10-year high in insider buyer, and extreme undervaluation, this trading range should be resolved to the upside in the days or weeks ahead. This will likely happen at the same time that the US dollar and Japanese yen fall as other currencies and commodity prices snap back from very oversold levels. Prices for assets other than cash are not just down, they are distorted. We know they are distorted because the interest rate on well over a $US trillion in one month US Treasury Bills is pretty well zero. The value of cash is too high and every thing else is too low. This will change.

That equity markets could improve flies in the face of almost every bit of information we hear. Last week I presented evidence that most analysts were optimistic at market highs and pessimistic at market lows. Last week there was more evidence of how unreliable some of the best forecasts are. Last month, the US Department of Energy (DOE) forecast that oil prices would average $112 per barrel for 2009. Last Thursday, the analysis and statistics wing of the DOE changed the forecast for 2009 from $112 per barrel to $63.50. It is instance like this that has made me realize that most economic forecasts and analyst opinions are of little predictive value. If an independent group of experts like the US DOE can be so wrong, what can we rely on? I believe that one of the best things to rely on are statistical measurements (such as the Value Line information mentioned last week) and the indicators you see in this update. For example, the short-term trend indicator turned red (predicting a downtrend) for oil on July 17 at $129 per barrel at which time I issued a special update with the headline "Oil is Peaking." It proved to be very accurate. (Please see an up-to-date chart for oil below.) The reason they are reliable is that they measure what is actually going on in the marketplace. When buying peaks, the uptrend is over, no matter how positive things appear to be. When the selling subsides, the downtrend is over, no matter how bleak the news presents things to be or how worried people are. When the short term and then the long term trend charts turn green (positive) it will be a very clear indication that the trend has changed.

Prices for any asset peaks when there is positive news and bottoms when there is negative news. The long-term oscillators indicate that the worst-case scenario has been factored into the current prices of many assets. The major sector that has not turned positive yet is the US financial sector. (See the US Banking Index BKX chart.) These stocks are hovering near the July 15 and October lows and seeming to be holding the markets back. They need to show some strength in order for the markets to turn. I will continue to do my best to keep you informed of any changes, which could now happen at anytime.

Bonds – According to the oscillators, the outlook for US and Canadian bonds is still positive.

Commodities – Gold and oil (and their stocks) are very oversold but have not started an uptrend yet.

Currencies – The US dollar and yen have not weakened enough to indicate a trend change.

This short term trend chart shows the basebuilding of the US markets since Oct. 10. The DJU is providing leadership but the financial sector is not. One of the initial signs that the trend is changing will occur when this indicator turns green for all market indexes.

The Volatility Index is not as high as it was at the market low on Oct. 27. This should turn red to confirm a trend change for all the market averages.

The long term trend chart for the SP 500, TSX and other market averages should turn green to indicate that the shorter term uptrend has longer term potential. That will take time or a major advance.

The long term oscillator for the US Banking Index will turn up to indicate that the stocks in the US financial sector have finished testing the July, October and November lows.

While the US financials are weak, the Dow Jones Utilities Index (DJU) is showing traditional leadership by continuing to rise since the Oct. 10 lows even though other market averages have continued to revisit the lows. This is a good clue that the basebuilding phase should transition to the upside.

The Canadian TSX and other global market averages should turn green when the US markets turn positive too.

The long term oscillators for Canadian and US bonds turned positive in recent weeks and are still in the early stages of an uptrend according to this. Bonds often rise before stocks do.

Precious metal stocks are oversold and poised to rise once the financials get their act together.

Energy stocks also seem like they are poised to rise as soon as the US financials stabilize and turn up.

Gold is oversold but has not turned up yet. Since everything is very oversold, a turn can come at any time.

The chart for oil has been red ever since July 17 when oil was at $129, even during the big spike in September.

The long-term oscillator for the euro vs. yen is oversold and has turned up. There has been improvement but not quite enough to turn the short-term trend indicator green. That will be another important confirmation of a change in the trend for asset prices. It will be over when it is over.

Volume I, Issue 46

THERE IS EVERY INDICATION THAT EQUITY MARKETS ARE POISED FOR A VERY MAJOR ADVANCE IN COMING WEEKS. THERE ARE POTENTIAL GAINS OF 90% TO 180% IN THE NEXT THREE TO FIVE YEARS ACCORDING TO VALUE LINE. OIL APPEARS TO BE NEAR A LOW.

Political change came to America last week. However, equity markets are still going through the base-building process whereby stocks are transferred from weak hands to strong hands. This process usually lasts six to seven weeks. Since US markets bottomed on Oct. 10, it means that a change in the equity markets (starting a new uptrend) should occur near the end of November. Please see a picture of the base-building process in the chart below.

While our emotions and the negative economic news makes it seem like the light at the end of the tunnel has been extinguished, here are the reasons why equity prices are poised to move much higher in the months ahead:

• For more than 100 years, the US markets have almost never declined more than 50%. The only exception occurred after the 1929 crash. In the fall of 1929, US stocks were extremely overvalued at a bubble stage. The markets declined 50% in two months and then rose 50% in five months before drifting lower for another two years as lawmakers increased interest rates and taxes. It wasn't until 1933, four years after the crash that Roosevelt injected cash into 6,000 US banks. The prompt action taken during this crisis is radically different from the Depression. The economy is also following the path of a recession, not the 1930's depression. Stocks were not overvalued in 2007 like they were in 1929 either. Therefore, since the SP 500 Index declined 47% from the October 2007 high, history suggests that the extend of this decline has pretty well reached the maximum. Although it may feel like the risk has increased, the risk has actually been reduced by 50% since last October.
• Sharply lower interest rates make every other investment more attractive than cash. Lower rates, a huge decline in oil prices, a historic increase in liquidity and stimulus packages all boost the economy, but it can takes six months or so to have an impact. Equity markets usually respond six to twelve months ahead of the economy. US equity markets have already declined as much as they did during the very sever 1973 - 1974 recession and more than they did during the 1981 - 1982 economic down turn. Therefore, the worst recession that could occur has already been factored into current stock prices before it even occurred. After declining for 13 months, US equities should soon reflect the positive affects that lower interest rates, increased liquidity and lower oil prices will have on the economies of the world. Canadian and other global markets typically follow the trend of US markets, which make up 50% of all global equity markets.
• The potential gains for the next three to five years are between a low of 90%, or 19% per year compounded annually to a high of 180% or 31% compounded annually. Value Line produces these figures. Value Line is one of the world's largest and most respected research firms in the world. It is totally independent and has a very good record over its 75-year history. The last time Value Line predicted that the potential returns were this high was near the 1974 recession low and the 1982 recession market bottom. Five years after the 1974 lows, the SP 500 rose 70% and the Canadian TSX rose 11%. Five years after the 1982 market bottom, the SP 500 jumped 152% and the TSX rose 135%.
• As a group, analysts actually have a very poor record of forecasting future trends. At the US market highs last October, 60% of advisors were optimistic and only 20% were pessimistic. Near the Oct. 10, 2008 lows, only 22% were optimistic and 53% were pessimistic. Directors and executives of companies, however, have a much better record of selling and buying. Corporate insiders were heavy sellers last October and have recently been buying shares in their own companies at the highest rate in ten years. That means that they have confidence in the future of their business and feel that they are purchasing shares at bargain prices. A chorus of analysts were calling for oil prices to reach $170 this summer. Now the media is highlighting forecasts of $50 or even $20 per barrel. Be very careful about using media information to form an economic or market forecast. It is often unreliable.

In conclusion, the markets could continue to be volatile for the rest of November. However, the risk has been reduced as low as it usually gets while the potential for attractive gains over and above previous record highs is almost as high as it every gets in the years ahead.

This daily chart of the SP 500 shows that the markets bottomed on Oct. 10 and have been in a trading range since. This could continue until the end of November. Dropping down near the October lows one more time before a major advance starts is still a possibility.

When this short-term indicator turns green for the SP 500 Index, it will issue a short-term buy signal. The same indicator will likely turn green for most other global equity markets at the same time.

Bonds - The long-term oscillators have turned positive for US and Canadian bonds.

Commodities - No indications of an uptrend for gold but the long-term oscillators have turned positive for oil.

Currencies - Initial signs of lows in the euro and the Canadian dollar are in place. Further confirmation is required. Equities, commodities, and currencies will likely all together in a mass rally once the financials can show some strength.

The long-term oscillators for the SP 500, S&P/TSX and all other global markets turned up on Nov. 3. However, financial stocks are holding back the markets for now. See the Banking Index chart below.

The financial sector is a very large and significant sector in US markets. The Index has been struggling after reaching a low on July 18 and Oct. 10. This sector needs to rise in order for the markets as a whole to gain strength. The long-term oscillator does look like it is ready to turn up (see the black line on the far right). This is the key sector to keep an eye on.

Interbank lending rates continue to move lower, indicating that the liquidity crisis is improving. The rate banks charge each other has declined from a peak of 4.84% on Oct. 10 to 2% now. 0.50% is normal.

The long-term oscillators for US and Canadian bonds are positive. Higher bond prices can make stock prices more attractive.

The long-term oscillator for gold has not turned up yet. When it does, it will indicate at least a multi-week uptrend.

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The long-term oscillator for oil is bottoming. If it can turn up convincingly next week, it will indicate that oil prices have reached some sort of low. See the trend chart below.

After the long-term oscillator turns up all the way, the next step to confirm the uptrend will occur when this short-term trend chart turns green again. The last time it was green was on July 17 when oil was at $130 per barrel. I read that T. Boone Pickens lost $2 billion on oil and closed down some of his investment funds. Looking at this could save him from that.

The long-term oscillator has already turned up from the euro vs. yen. When this indicator above turns green, it will confirm that the euro has made a low. It will also indicate that investors are more willing to assume risk again for the first time since July.

The long-term oscillator for the euro vs. yen has had a rare double bottom and has turned up. The CAD$ vs. US$ looks like this too. This suggests that the worst-case scenario has been factored into current prices. Prices or values usually rise for anywhere from one to six months after this happens.

Volume I, Issue 45

BASE-BUILDING PROCESS HAS PRODUCED STRENGTH AS US BAILOUT MEASURES ARE ENACTED. ASSET PRICES ARE STILL DISTORED AND COULD SNAP BACK CLOSER TO NORMAL ANYTIME. A RETEST OF THE OCTOBER LOWS IN A FEW WEEKS IS STILL POSSIBLE.

The Oct. 15 update was one of the earlier reports to state that investors had likely seen the worst of the declines and that North American stock markets were transitioning to a base-building phase. That is exactly what has happened since the Oct. 10 lows. There have been some gut-wrenching declines as recently as last Monday, but they have been followed by huge advances. While this October was the worst in 10 years, last week the DJIA had the strongest advance since 1974. The TSX had stellar gains for three days in a row -- something that has not been seen for awhile.

There have been some fundamental improvements as well. After approving a bailout package weeks ago, the US government invested $125 billion in healthy banks, which equates to $1.25 trillion in lending capacity. On Oct. 27, the Fed's Commercial Paper Funding Facility opened and $100 billion of commercial paper was issued last week. This has improved liquidity and continued to reduce interbank lending rates even though they are still at distressed levels. A half point cut in US interest rates on Wednesday was another attempt to throw gas on a smoldering flame. Week ago, I mentioned that as a problem gets worse, more and more energy is devoted to solving it. Authorities have now done much of what they can do to improve liquidity. The focus is now shifting to helping the economy. While the US economy has been okay up to this summer, US stock markets have been declining since October 2007 and have fallen as much as they would if a very severe recession had occurred. Therefore, it is most likely that the worst-case scenario has already been factored into current stock prices, even if the US economy continues to deteriorate into 2009. Tomorrow's election will also improve the investing climate, as an issue of uncertainty is resolve.

Green indicates an uptrend and red indicates a downtrend in this short-term trend chart of the SP 500 Index. When this turns green it will issue a short-term buy signal. This short-term indicator should be used together with the following two longer-term indicators for confirmation.

So far, equities have followed a pattern very similar to the financial panic of 1907. That liquidity crisis occurred after US and British insurance firms were unable to cover the losses when an earthquake destroyed San Francisco in 1906. If markets continue to follow that path, there should be further major advances in the coming weeks with only small declines along the way. US equity markets recovered most of the losses of 1907 in 1908. Canadian markets usually follow the trend of US markets.

On the other hand, in a normal correction scenario, the markets should advance for another week or two and then retest the Oct. 10 low in the latter half of November. However, the successful retest of the Oct. 10 lows on Monday, Oct. 27 may mean that another retest in late November is not needed anymore. Either way, the coast should be clear for a major advance by the end of November, if not before.

It is interesting to observe that the period of 1900 to 1914 was one of relative prosperity in spite of the financial crisis in 1907. This shows that a financial or liquidity crisis, on its own does not always hurt the economy. The crash of 1987 did not hurt the economy very much either.

This has been one of only a few times in history when the price of almost every asset type has fallen sharply. The main exceptions are the US dollar, the Japanese yen, and short-term Government Treasury Bills, which have spiked higher. The Japanese government has warned currency markets that it could intervene to try to lower the yen because it is causing problems. One month US T-Bills yield only 0.12% (yields actually dropped below 0% in October), when one year yields are 1%. That spread is far too wide. It is very obvious that the price of assets, such as the yen and short US T-Bills, are distorted to the upside. I would suggest that the US$ is over priced as well. If these assets are overpriced, it only makes sense that the prices of other assets are distorted to the downside.

Another example is Canada. The IMF reported that the Canadian banks are the safest in the world. Canada has low inflation, a trade surplus, and has had budget surpluses for years. It has just been reported that of all global governments, the Canadian government is least likely to default on its debt. Does it make sense that the CAD$ should decline 20% against the US dollar in October?

This long-term trend indicator has been negative for the SP 500 Index since it peaked last fall except for a brief period this May. It will take some time or a big rise for this to turn positive again. US markets make up over 50% of global markets and are usually the first to rise up from a low and lead other world markets higher.

At some point, the hundreds of billions parked in 30-day US T-Bills is going to move where it can earn more than almost 0%. Of course no one wants to be the last to move. When this massive shift occurs, it could produce violent moves to the upside for assets that have declined and violent corrections in the US dollar, short T-Bills and the yen. Don't stand in its way!

Bonds - The buy signals given for Canadian bonds on Oct. 20 and US bonds on Oct. 27 are on hold temporarily. This is a very rare occurrence, which is likely due to quick, extreme moves. The slow growth in US money supply has been starving the economy for years so the truckloads of liquidity now being added may not produce as much inflation down the road as some expect. This is positive for bonds.

Commodities - The long-term oscillators have turned positive for gold and energy stocks but not gold or oil. History shows that precious metals and energy stocks can be influenced more by the direction of equity markets than by the underlying commodity. The previous comment about US money supply not producing inflation could have negative ramifications for gold too.

Currencies - These are signs that the US$ and yen could be peaking. More confirmation is required for most indicators.

The long-term oscillators usually give very good buy signals when it declines to the oversold level of 0.2 on the left hand scale and then turns up. It usually gives two signals at year at correction lows. It bottomed and turned up on July 17, 2008 after the financials bottomed as the short financials/long resources trade profits peaked. After a rise to the end of August and decline to the end of October, this indicator has now turned up for US, Canadian and most other global markets. Although a double bottom later this month can not be ruled out, this indicator suggests that the markets should rally for at least a month and up to six months.

If you look closely at the top right corner by the number 42, you will notice that the indicator (the black line) for the Volatility Index (VIX) has peaked at the second highest level since 2004 and turned down. This is very positive for equities as it suggests that volatility has peaked and should be declining. This confirms the positive signals the indicators are giving for the SP 500 Index and global markets.

The short-term trend chart for oil turned red, giving a sell signal on July 17, 2008 when oil was at $129. It will take more time or a rise in the price of oil above $75 for this to turn positive. When this happens it could have positive ramifications for other commodities too. The long-term oscillator has not turne dup for oil yet.

The short-term trend chart needs more time or a bigger rise to turn positive for gold. The long-term oscillator has not turned up for gold yet.

The long-term oscillator has bottomed and turned up again for US and Canadian gold stocks. When the oscillator turned up from these low levels in 2004 and a double bottom in 2005, gold stocks performed very well.

US and Canadian energy stocks are very oversold. The long-term oscillator has turned up after a double bottom. This bodes well for energy stocks and the TSX Index. As proven in September and October, stocks can follow the markets more than they follow the underlying commodity.

This shown in graphic detail the unwinding of the carry trade where investors borrowed money from Japan at interest rates close to 0% and invested the money elsewhere for a higher return. The euro collapsed and the Japanese yen soared and investors reduced risk by selling investments and buying the yen to pay back those loans. When this turns green again, it will indicate that the selling and unwinding could be over.

The long-term oscillator for the euro/yen has turned up after a double bottom. When the short-term indicator shown above turns green it will confirm that a new uptrend could be starting for the euro.

This US$ had a huge advance against most other currencies after being in a downtrend for years. When this turns red, it will be one of the indicators that the US$ has peaked compared to the Canadian dollar and perhaps other currencies as well. It could turn red soon.