Volume I, Issue 38

THE US FINANCIAL CRISIS APPROACHES A CLIMAX AS THE "WHEAT IS SEPARATED FROM THE CHAFF." BUY SIGNALS ISSUED FOR GOLD AND GOLD STOCKS. OIL PRICES HAVE DECLINED INTO THE RANGE WHEN A BULL MARKET FOR EQUITIES USUALLY STARTS.

Many market bottom shave occurred along with the failure of a major financial company. However, this is the only time during my 27-year career when I can recall multiple failures occurring all at once. While Bear Stearns, Fannie Mae, and Freddie Mac were taken over with government assistance, Lehman and others are now being able to die a natural death. This is the way it should be. This is how the real cleansing process works. Firms where management believed that adopting the lending practices of a drunken sailor was the path to riches are paying the ultimate price. This is what is making the news. What is not making the news, is that more than 90% of the other financial companies resisted the temptations to stray from their principles. Their prospects have improved tremendously. That is why, even after today's 504 point decline in the DJIA, the US Banking Index (BKX) closed at 65.34, still up 40% from the low of 46.52 reached exactly two months ago.

The shock wave from these events caused chap declines today. This often happens on the Monday after a negative event. The markets often decline for the first half of Tuesday's trading and often turn around for the later half of the day. Many indicators suggest that we are very close to the end of this market correction that began last summer. A big rise accompanied by very high volume on rising shares will confirm this. So far, this heavy volume on the upside has been missing during previous rallies. We will have to see what happens after this.

On June 10, 2008, a special update was published explaining Leib's Law. Stephen Leib showed that equities have entered a bear market after the price of oil has risen more than 80% in one year, which happened this spring. It has turned out to be accurate once for equities again. He also stated that equities begin to rise again when oil prices decline to the point where the price of oil is only up 20% in the past 12 months. Twenty percent above the mid-point between the high and low price for oil last September is $94.40. The same level for next month is $104.16. Oil closed today at $94.10 per barrel. Just as it was easy to ignore the negative ramifications of the sharp rise in oil this summer, it is easy to ignore how positive this decline in the price of oil is for consumers, businesses, and therefore equities, all around the world. Do not let all the other market action distract you from this significant development.

After a 6.9% decline in the three days after Labor Day, the S&P/TSX dropped sharply last Monday and Tuesday but recovered nicely to end last week with the loss of only 46 points or 0.4%. Hopefully the same thing can happen this week. The long-term oscillators have now issued a buy signal for gold and gold stocks, which should help the TSX. The headline in the July 29, 2008 update stated, "Indicators Suggest that Gold has Joined Oil's Downtrend." Gold was $927.70 then and closed at $783.10 today, a decline of $144.60 or 15.6%.

The indicators also suggest that the euro is bottoming compared to the yen. This means that enough of the carry trade has been unwound so that global investors will soon be willing to assume more risk. This is another development, which implies that the selling of equities and commodities has been overdone and is due to reverse. Time will tell. As always, I will keep you informed.

Bonds - Yields seem to have bottomed in Canada and are in the process of doing so in the US.

Commodities - The long-term oscillators have issued a buy signal for gold and gold equities, but not silver.

Currencies - The oscillators have issued a buy signal for the euro vs. USD and the CAD$ vs. the USD. The euro is bottoming vs. the yen.

Even though the SP 500 Index is at the same level today that it was at the July 15 low, the long-term oscillator is higher. This is a positive divergence. I believe today's severe sell-off with only 164 issues advancing and 3,064 declining was the most extreme since Oct. 16, 1987 and the crash of Oct. 19, 1987. October 19 was the closing low. A bottom could be close.

The oscillator for the US Banking Index is still rising. You can see how much higher values are now than they were two months ago.

The long-term oscillator for the Volatility Index has turned up and the VIX is now near the same level that is reached in July.

The long-term oscillator for the TSX is still rising after a good recovery last week. Hopefully it can accomplish the same feat this week.

The long-term oscillator for gold stocks has finally turned up and issued a buy signal, which would be good for the TSX.

Canadian bond prices look like they have peaked for the time being.

The long-term oscillators finally turned up and issued a buy signal for gold. The oscillator peaked and turned down on July 18 when gold was at $927.70. That is when I mentioned that gold was joining oil's downtrend. After that gold declined sharply and after today's rise, it is still down $144.60 or 15.6% since July 28.

The long-term oscillator for the Commodity Research Bureau (CRB) Index is very oversold and ready to turn up any time.

The CAD$ appears to be making some sort of low vs. the USD since the oscillator has turned up from the fully oversold level.

The oscillator has issued a buy signal for the euro vs. the USD since it turned up from a very oversold level after a sharp decline.

The oscillator is very close to issuing a buy signal for the euro vs. the yen. This suggests that most of the heavy selling, unwinding of the carry trade and reduction of risk has occurred. Hopefully this week will end better than it started.