Volume I, Issue 48 | email: info@outperform.biz

A CLASSIC, FINAL RETEST/DOUBLE BOTTOM OCCURS RIGHT ON SCHEDULE. BASEBULDING STAGE IS OVER AND A NEW UPTREND APPEARS TO BE STARTING. HISTORY SUGGESTS THAT THE RISK IS NOW CLOSE TO ZERO AND THE POTENTIAL FOR UPSIDE IS CLOSE TO 100%. MASSIVE DELEVERAGING AND EXTREME UNDERVALUATION MEANS THAT THIS SHOULD BE A TIME TO ADD SOME LEVERAGE AND RISK IF YOU ARE SO INCLINED. GOLD AND GOLD STOCKS ARE FIRST OUT OF THE GATE.

After the markets made new lows on Oct. 10, the update of Oct. 15 headline stated that the declining phase was over and a base-building phase had begun. Since a base-building stage usually lasts six to seven weeks, previous updates have forecasted that the markets should start a major advance around the end of November. A major turnaround occurred on Friday, Nov. 21, which is exactly six weeks from the Oct. 10 low. Eighty percent of base-building stages end, and new uptrends begin with a retest of the previous lows and/or double bottom. Thursday's market action was a classic final retest double bottom.

Retesting the lows or making a double bottom is usually an ugly, horrid affair. It has to be this way in order to exhaust the heavy selling. What usually happens is that market tend to probe the lows made six or seven week earlier. As this happens, fear increases and there are more and more experts suggesting that prices could decline even more. In 40% of cases, the markets drop below the previous low. This triggers stop-loss orders, causes panic selling, and a peak in short selling. Once everyone who wants to sell has sold, prices cannot go down anymore and they rise with a vengeance. This exactly is what happened on Thursday.

This chart from the 1982 bear market and recession shows that the US SP 500 Index dropped 5% below the initial low on the final low before spiking 70% in a year. Today's chart looks identical. See below.

After a major decline into Oct. 10 and almost six weeks of base-building, North American markets fell well below the previous lows as they sold off sharply at the end of the day on Thursday, Nov. 20. There was a chorus of experts saying that prices could fall much more because support levels were much lower. (Remember how accurate the chorus of experts was when they forecasted that oil was going to hit $170 by Labor Day?) As market declines approach 50% from their peak, the last sellers had reached the end of their rope. With the leaders of the GM, Ford, and Chrysler in Washington presenting the worst case for their future to secure a bailout, and banking behemoth Citigroup self destructing, it was no wonder. Even the most seasoned investors felt like they had taken a blow to the stomach. Then, by the close of trading on Friday, a simple announcement that Obama had named his choice for the Treasury Secretary reversed all of Thursday's losses in the US and most of the losses in Canada. (It was most interesting to see that Asian markets rose on Friday -- they were closed by the time US markets opened on Friday -- as if to indicate that they had had enough of the silliness.) Additional strength in the days ahead should confirm that this was a classic final retest, which is followed by a major advance. The 1982, 1987, and 2002 bear market ended in the same way.

US markets have never declined more than 50% before a major rise. Therefore, history suggests that the risk of more downside should be close to zero and the potential for gains should be close to 100%. This is the first time that the dividend yield on US stocks has exceeded the yield on 10-year government bonds since early 1958. (Markets soared in 1958.) US stocks are undervalued by 30% and Canadian stocks are undervalued by as much as 47%. Most analysts are pessimistic (they have a record of being most optimistic at market tops and most pessimistic at market bottoms) and corporate insiders are so confidence in the future of their companies that they are buying shares in their own companies at the highest rate in 10 years. Corporate insiders are usually right within a month or so. The evidence is overwhelming. As of Friday, the markets have fulfilled the time requirements necessary to move higher. As one of the world's best investment firms, JP Morgan said a week ago, "Add risk to your portfolio after Nov. 23, 2008."

Today's chart looks almost identical to the 1982 chart above. Time will tell if it will follow the same path. This shows that the current market action can lead to a massive rally. Arrows mark initial lows and retests.

The Dow Jones Utilities Index often leads the markets. The double bottom here has been more positive. It is the financials which have been causing the weakness in the markets. They are up 10% in the US today.

Energy and gold stocks have produced a normal double bottom. These sectors have the potential to perform very well.

The Canadian TSX Index followed the same path as the US markets due to the potential collapse of the world's biggest bank, Citigroup, caused weakness in other financial stocks. The US financial stocks need to show some strength now. They are up 10% today.

Bonds - Bond prices spiked to multi-year highs last week as the flight to quality intensified due to market turmoil. The buy signal issued by the oscillators weeks ago was accurate. I would be inclined to take some profits here sine the outlook could become more positive as stocks rally.

Commodities - The long-term oscillators for all commodities have been extremely oversold and many have ad double bottoms while waiting for the US financials to bottom. That could well have occurred on Friday. Gold and gold stocks have risen sharply and the short-term trend charts have been the first to turn green. Oil and energy stocks should follow along.

Currencies - The euro has made a perfect double bottom vs. the yen and the US$. The CAD$ has made a perfect double bottom vs. the USD$. The euro and the CAD$ should rise while the yen and the USD$ may have seen their highs. The next step is for the short-term trend charts to change.

Equity, commodity, and currency markets are poised for major trend reversals. It may have already begun. I will keep you informed.

The decline in US financial stocks has been holding markets back. A deal to secure Citigroup was reached over the weekend and the long-term oscillator for the US financials has finally turned up. This indicates that the worst-case scenario has been factored in. This is what we have been waiting for to give the all-clear signals for equities. The last time this happened was July 17.

The long-term oscillator for gold turned up and the short-term trend chart has now turned green. This means that the trend has changed from positive from negative. The long-term trend chart will also turn green if the uptrend will last longer. Gold is one of the first commodities to turn positive. This forecasts weakness in the US dollar and the possible move away from the safety of the US short term Treasury Bills paying 0%. This would be very positive for almost everything.

Gold stocks made a perfect double bottom and the oscillators did too. The trend charts for US and Canadian gold stocks have turned green, or positive. This is one of the first sectors to turn green. This early strength could signal out-performance for precious metal stocks.

The long-term oscillator for oil has been very oversold and could rise at anytime. A rise should coincide with an improvement in the equity markets. I will alert you when the short-term trend charts turn green/positive.

North American energy stocks and their long-term oscillators have made a double bottom. They are poised to rise. Many trend changes will likely occur all at once.

You can see the perfect double bottom that the euro has made vs. the Japanese yen. This reflects the carry trade and the willingness to assume risk. Further strength would turn this indicator green (positive) for the first time since early August. This would be a significant improvement for equities, commodities, and currencies. Hang on to your hats!

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.