THE PASSAGE OF TIME, THE LEVEL OF PESSIMISM AND LONG TERM OSCILLATORS SUGGEST THAT A BOTTOM IS APPROACHING FOR THE DJIA AND SP 500 AS THEY TRADE NEAR BEAR MARKET TERRITORY. THOSE WHO FOLLOWED THE ADVICE GIVEN HERE TO INVEST IN CANADA HAVE HAD A MUCH MORE POSITIVE EXPERIENCE.

As of Friday's close, the DJIA was down 19.8% from the 2007 high (a 20% decline officially qualifies as a bear market) and the SP 500 was not fairing much better. In the meantime, the S&P/TSX Index was down only 1.8% from it's 2007 high and down 4.8% from the new record high reached last month. The first two updates this year entitled "The Big Picture Part one and Part Two" gave the rational for investing in Canada, since the 16 to 20-year cycle that favored the US in the 1980's and 1990's had ended in 2002, and was now favoring Canada. For this reason, I ignored the conventional wisdom of investing in US and international investments, and recommended in the US and Canada during the last year is further confirmation of the powerful impact of these long-term cycles and how important it is to invest along with them, instead of against them.

The decline in the DJIA and SP 500 (the DJT, DJU, NASDAQ, and Russell 2000 have held up much better than the DJIA and SP500) along with all the negative news, has once again raised the level of pessimism close to the high levels where markets have bottomed in the past 10 years (refer to the Investors Intelligence chart below). Markets typically correct six to seven weeks after a high and we re right in that time frame right now, considering that the markets peaked around May 17. Moreover, the long-term oscillators for the SP500 and especially the DJIA have now declined to the fully oversold level (0.2 on the left-hand scale). When this occurs, it indicates that the worst-case scenario has been factored into current prices so that prices probe their lows. It also suggests that prices are so low that they can be compared to a spring that has been compressed so much that it cannot go down anymore. When the selling pressure is reduced from this extreme, stocks rebound in a major way just as a spring rebounds quickly and violently when the pressure is released after it has been fully compressed. Many major portfolio managers take the summer off. Much of the selling they wanted to do could be completed by now. While human emotions make us feel that things seem like they are about to get much worse, the indicators suggest that investments could perform much better in the near future. How can we have confidence in this?

One year ago, before the sub-prime problems became a major concern, the headline of the July 2, 2007 update stated, "Use strength to take profits and reduce equity exposure." The TSX peaked almost three weeks later on July 20 before dropping to an August low.

In a special update published a few weeks ago, I illustrated how a rise of 80% or more in oil prices in one year caused bear market declines in the past. It appears to have been accurate once again fro the DJIA and SP 500 anyway. A decline in oil prices may likely be the catalyst for a market rebound. I will continue to do my best to keep you informed. In the meantime, let us be thankful for the opportunities and the quality of life we can enjoy in Canada!

Bonds - The long-term oscillator has once again given a buy signal after giving one a few weeks ago aborting it. Does lower bond yields imply that there will be another flight to quality as equities are under duress or does it mean that lower yields will make stocks more attractive? Only time will tell.

Commodities - The long-term oscillators turned up for gold and silver many weeks ago giving a buy signal, but it seems as though they were having difficulty establishing an up trend. Last week the prices rose and the oscillator continued its up trend suggesting that gold and silver prices (along with gold and silver equities) are still likely to move higher. The long-term suggesting that oil could be in a topping process for weeks now, ever since the price rose over $120 per barrel. Anything can happen at this stage of a long sharp price rise but the risk of a decline is likely very, very high. We will have to let time and market forces do their work here.

Currencies - The CAD$ still seems weak compared to the US$. However, after mentioning last week that the euro had reached the overbought range versus the yen, the long-term oscillators suggest that the euro may have some sort of peak versus the yen and bottomed compared to the US$.

 

The long-term oscillator for the SP 500 is close to the 0.2 level on the left-hand scale which means that it is now in a fully oversold territory where lows have occurred before. It could still take another week or so to go a little lower before turning up.

 

There are now 5% more bears than bulls which has only happened four times in the last ten years (during the 1998 Clinton impeachment/long-term capital crisis, after 9/11, at the bear market low in October 2002, and at the March 2008 lows). This suggests that prices are about as depressed as they get and close to a turn.

 

The long-term oscillator for the Dow Jones Industrial Average is very oversold, only having gone this low once before during the last five years in 2005.

 

The long-term oscillators for the TSX, NASDAQ, Russell 2000, DJ Transports and Utilities Indexes are not nearly as oversold as the DJIA and SP 500, which is positive. It suggests that many stocks are performing much better than they did in March when the DJIA and SP 500 traded at these levels.

 

The long-term oscillator has once again turned up from a low suggesting that bond yields should decline while prices rise.

 

The long-term oscillator for copper has turned up after correcting for several months.

 

The long-term oscillators for gold, silver, gold stocks, and silver stocks all look like this. This suggests that the rally finally has some strength behind it after indecisive action for several weeks.

 

The price of oil moves higher while the long-term oscillator makes lower highs. This is usually a sign of weakness before a decline, but it has been going for a long time with oil.

 

The price of natural gas and the long-term oscillator continue to make higher highs, which is different than the scenario for oil.

 

The long-term oscillator for the euro vs. the US$ has turned up, suggesting that the euro should make gains against the US$. The euro may have reached a short-term peak compared to the yen as carry trade positions are reduced due to weakness in equities.

 

Data supplied by