SELLERS HAVE TO SIGNIFICANTLY LOWER THE PRICE IF THEY HAVE TO SELL AS THE HIGHWAY OF GLOBAL LIQUIDITY REMAINS BLOCKED BY A MAJOR ACCIDENT. THE FINANCIAL COMPANIES PULLED THE MARKETS DOWN LATE LAST YEAR. IN SPITE OF MASSIVE FAILURES, THE SHARE PRICES OF MOST FINANCIAL COMPANIES ARE MUCH HIGHER THAN THEY WERE OVER TWO MONTHS AGO. IN FACT, ON FRIDAY, JP MORGAN WAS NEAR A ONE YEAR HIGH, WELLS FARGO WAS CLOSE TO AN ALL TIME RECORD HIGH AND THE ROYAL BANK WAS UP 29% FROM THE JULY LOW. AFTER RISING FOR OVER TWO MONTHS, THE FINANCIALS ARE BOUND TO PULL THE EQUITY MARKETS HIGHER ANYTIME.

Equity markets are experiencing a violent sell-off like they did right after Sept. 11, 2001 and at the end of the bear market in October 2002. When liquidity and the volume of trading for everything but government guaranteed investment declines, investors who want to sell, or have to sell stocks in an instant, have to substantially drop their asking prices. This is why the markets are so volatile.

Selling in global markets is bound to continue until US legislators will meet again in a few days. This time, they will be sure that their effort to clear the massive accident that has blocked the global highway of liquidity succeeds. Even though the market averages declined last week, the technical picture still points to a positive resolution of this crisis. Indeed, the shares of most financial companies, which are at the center of this financial hurricane, have continued to act much better since they bottomed two and a half months ago. Even after AIG, Freddie Mac, Fannie Mae, Lehman Brothers, and Washington Mutual became penny stocks, the index of US Banking Stocks (BKX) still closed 26% higher today than it did on the July 15 low. In Canada, the TSX Financial Index (XFN) closed up 13% from the July low, even after a 4% decline today. What is this telling us? It is very clearly showing us that the worst-case scenario was factored into the price of most financial companies months ago. Just as it took several months for the equity markets to follow the financial stocks lower last fall after the subprime problems were revealed in the summer of 2007, it will take several months for the equity markets to follow the financial stocks higher now. (Two and a half months have already passed since the financial stocks have improved.) When exactly this will happen is hard to tell. But it can happen anytime.

US stocks are trading 24% below fair value, the same level as they did at the low of the 2000 - 2003 bear market. The level of fear and panic is measured by the the Volatility Index (VIX) has now reached the same peak as it did during the long term capital/Russian default crisis market low in 1998, at the market low on Sept. 21, 2001 after the World Trade Center collapsed and the bear market lows in July and October 2002. The amount of cash in money market funds is at levels last seen at the end of the previous bear market. These extremes in fear and panic selling do not usually last very long and markets have had meaningful advances after each of the periods mentioned above. Just as it was prudent not to buy into the overwhelming sentiment that oil prices were going to even higher this summer, the technical information and the very obvious out-performance of financial indexes indicate that it is not prudent to believe that this downturn can continue much longer either. Hang on to both edges of the canoe until we get through these rapids to calm water.

Bonds - Government bond yields are staying within a trading range even though they are the most popular asset right now. If this is all that happens at this level of fear, yields could rise substantially when this is over.

Commodities - The trend for gold and gold stocks is still positive but the lack of a move to record highs in gold with this level of fear is concerning. The up trend for oil and oil stocks has stalled for the time being.

Currencies - No change from last week. The USD is in a downtrend vs. the CAD$ and the euro. The euro is still in an up trend vs. the yen.

The oscillator has turned down for the first time since July. However, it did not get overbought so it can turn up at anytime and still have a long up trend when the crisis ends. Some sort of action by the government, regulators or the Federal Reserve usually coincides with a bottom. A major bankruptcy is also often associated with a market low but we have had more than enough of those!

You can see that the level of fear has now matched the readings seen at the lows of very major market decline in the last 18 years: the 1997 Asian Crisis, the long term capital/Russian default crisis in 1998, the September 11 attacks in 2001 and the 2000 - 2003 bear market. This alone suggests that we are very close to a turning point.

The red and green lines are the price of the US Banking Index. The up trend in the price and the strength in the oscillator are the best in years. Hopefully I will be able to say that about the equity markets soon! The US financials just about always lead the US markets, which in turn lead Canadian and global markets.

This chart from SentimenTrader.com shows that very high levels of cash are reached at market bottoms. It takes a big rise to encourage cash to return to equities so holders of cash miss out on that.

The up trend in the long-term oscillator for the TSX has stalled a month after it got started. This is unusual but it does happen on rare occasions. It is still oversold so it could just as easily turn back up again.

The same comments for the TSX apply to the TSX Energy Index.

According to the oscillator, the up trend for gold stocks is still intact.

Prices on US and Canadian government bonds are not any higher than they were at other times in the last year which is interesting. If this is the best that bonds can do at the worst of times, they will likely not perform well when the investing climate improves. Liquidity of historical proportions has been added to the financial system. This is inflationary, which is negative for bonds.

The trend for gold is still up but the price is not anywhere near the record price of $1,000 that it reached during the Bear Stearns collapse in March. This is worrisome. With much more fear and worry than there was in March, investors should be very alert to how gold responds when fear subsides.

The up trend for oil has stalled. This could be temporary. It is still very oversold so it could resume the trend at anytime.

The euro is still acting relatively well compared to the USD even though bank failures are increasing in Europe too.

The long-term oscillator for the euro/yen price, which reflects the carry trade, still indicates that the euros up trend is intact. This would suggest that most of the de-leveraging using the carry trade has occurred and is now in the process of reversing.

Volume I, Issue 39

US GOVERNMENT ACTION HALTS THE 2008 MORTGAGE MARKET MELTDOWN. WHEN A PROBLEM BECOMES VERY SEIROUS, ENOUGH ENERGY IS EXPENDED TO SOLVE IT. A CHART IS WORTH A THOUSAND OPINIONS. BUY SIGNAL FOR OIL.

The action in financial markets last week, and the responses to it was history in the making. Major global corporations falling like dominos, US Treasury Bill yields falling below zero percent, a run on money market funds and bands on short selling are events that maybe occur once in a lifetime. Yet, by Friday's close, the US S&P 500 up for the week and the Canadian S&P/TSX was at a two-week high.

Since any and all interest costs are tax deductible in the US, the American financial system encourages the accumulation of debt. However, they also have a very good record of getting themselves out of a financial mess too. After analyzing the events that have occurred in North America during my 27 years of experience in the investment business, I have concluded that, when a problem gets bad enough, sufficient energy is expended to solve it. High inflation in the 1970's, a sever recession in the early 1980's, the US Savings and Loan Crisis in the late 1980's, the government deficits in Canada during the 1990's, and the bear market after 2000 were all problems that seem insurmountable. Yet, because the problems were so significant, the regulators and politicians received the support of the public to take tough action to solve it, which they did. Now that the current problems have become so serious, I do not see any reason why the action that will be taken will not eventually lead the markets and the US economy out of this crisis as well.

It is not necessary to repeat all the information and the opinions you can find in the media. What I would like to emphasize is a significant fact that seems to be all but ignored amid the frantic action. As mentioned previously, the BKX (an index of US banking companies) just about always leads the US markets, which, in turn leads global markets. As you can see in the chart below, the BKX bottomed on July 15 low, even though the SP 500 and DJIA made new lows for the year. By the end of last week, the BKX was 79% above the July lows! The only reasonable explanation for this is that the worst case scenario was factored into most of these companies during July. Market prices often reflect what will happen six to 12 months ahead.

Even at the lows last week the US Banking Index was 26% above the July lows. It closed the week 79% above the July lows. This implies that we could have seen the lows in the markets for this correction.

Since the BKX has successfully retested the July low with flying colors and has moved higher even as the markets made new lows, it could mean that the corrective phase which began last summer is over. In the charts below you can see that the long-term trend charts for BKX have also issued a buy signal for US bank stocks by turning green. This is the first time the BKX has turned green since the spring of 2007. Something is different this time. Therefore, we might well have seen the lows for the US and Canadian markets last week, even though there could be volatility and little news of economic improvement for months to come.

As an example of reflecting in the future, the index of US homebuilding stocks (XHB) peaked in 2005, from its July lows even though I cannot bring to mind any positive news on the housing front.

The other major positive factor that has not been emphasized is the massive global stimulus provided by, what was for some, a surprising decline in oil prices to $100 per barrel. (This summer, prominent New York analysts were calling for oil to soon reach $170 shortly before you received a special update from me on July 10 stating that oil prices were peaking). Gasoline, natural gas prices and airline surcharges are finally starting to come down. Some have said this is equivalent to a $100 billion stimulus program for the US alone. We will need a little more evidence that the roller coaster ride this summer has come to an end after a wild ride. I will keep you informed.

Bonds - Previous updates forecast that bond prices were peaking. It looked like that happened last week.

Commodities - The oscillators gave a buy signal for the TSX and energy stocks on Aug. 25, and a buy signal for gold and gold stocks Sept. 15, which was accurate in a spectacular way. As of Friday, the TSX was down 2.9% and XGD was down 8.7% from the buy signals. Since the buy signal last week gold was 10% and XGD was up 16%. Today a buy signal was issued for oil and fertilizer stocks.

Currencies - Buy signals have been given the CAD$ and the euro. The USD$ seems to have peaked. A buy signal was also given for the euro vs. yen. The reduction of risk seems to have ended for a while.

In this long-term trend chart of the BKX, you can see the sharp rise since the July 15 low (in spite of share prices collapsing for many major firms) has turned green for the first time since the spring of 2007. This has positive implications for the overall market trends in the US and Canada. It is different now.

By the end of last week the SP 500 erased all the losses incurred after Sept. 3. After such a big rise last week, there is bound to be some moves to the downside before a move to higher levels.

Even after days of bone jarring declines, the TSX made up for all of the losses earlier this week, the small 40 point loss the week before and even part of the loss in the days right after Labor Day. According to the oscillator, the trend is just in the early stages of a rise. There is bound to be some consolidation after the Friday's 848 point rise.

According to the long-term oscillator, oil stocks are still in the early stages of an up trend. The US financial system is reflating (adding massive liquidity to the economy) to help the mortgage and real estate market, which is good for economic growth and commodities.

Last Monday, the long-term oscillator gave a buy signal for gold and gold stocks, which was accurate in a spectacular way. Since last week's buy signal, gold was up over 10% and the TSX Index of Gold Stocks was up 16% in four days.

Fertilizer stocks like agrium and potash now have a major weighting on the TSX. According to the long-term oscillators, the sharp correction is over and these stocks should recover.

US and GOC bond prices peaked along with the fear in financial markets and dropped sharply by weeks end. This has been forecast in these updates for several weeks. The sharp rise in yields is another sign that fear is subsiding and the flight to quality is reversing. Reflating the financial system is negative for bonds.

After a major decline from $145 to $91 per barrel, the long-term oscillator has finally issued a buy signal for oil. A sell signal was issued on July 10 at $130 per barrel. Since oil had a speculative bubble, this could be more of a stabilizing phase than a rise to new highs. Time will tell. Today's big rise is likely an aberration due to future expiration.

Gold rose from 10.4% from $787 at the time of the buy signal given last Monday to $869 on Friday. This up trend is in the early stages. Reflating the US economy should weaken the US dollar, which should help gold and other commodity prices to move higher.

After a sharp decline during the summer, the euro appears to have reached a low and is in an up trend again.

There was a sharp reduction in leverage and the carry trade over the summer. According to this long-term oscillator, the trend has also come to an end.

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.