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Pivotal Events

The following is part of Pivotal Events that was published for our subscribers April 16, 2009

SIGNS OF THE TIMES:

Last Year:

"Downturn creates best value since '02."

"It is time to play offense rather than defense; it is the best value that I have seen worldwide since 2002."

- Financial Post, April 10, 2008

"Vacancy Rates Soar at US Strip Malls"

- Financial Post, April 10, 2008

"Hedge Funds Make it Hard To Say Goodbye"

"If you thought getting into a hedge fund was tough, try getting out."

- Wall Street Journal, April 10, 2008

* * * * *

This Year:

Senator Greg: "U.S. Couldn't even join EU due to debt levels"

- The Hill's Blog, March 26, 2009

"Gold is not good in a contraction."

- Nouriel Roubini, BNN, April 7, 2009

Clearly, Roubini's work on gold is not yet complete.

"Emerging Markets on a Tear"

"It's one of those times when you run a $7 billion fund, and wish you had more money."

- Oppenheimer Fund manager who "hasn't felt this optimistic on emerging markets in a decade."

- Wall Street Journal April 12, 2009

Well, it has been possible that sentiment could become bullish in April-May, and this one is first-rate. Why, even the perma-bulls are becoming hopeful.

STOCK MARKETS

Are we there yet? Important question and it leads to: Checklist For A Top:

  • Is the market up when it should be? - Yes.
  • Is there enough momentum to confirm a top? - Yes.
  • How sound is the underlying story? - Not really.

On the first check; in the immediate post-crash year stocks can rebound out to April, as in 1930, or May as in 1874. Last summer, our target for the last part of the year was a classic fall crash down to a low in November. That would be as in 1929 and 1873 etc.

Our update on Classic Fall Crashes was sent out on December 4, and it included the following table:

  1873 1929 2008
• Start of Crash Early Sept. Sept. 3 Aug. 28
• First Selling Concern Ended Sept. 19 Ended Sept. 21 No Pause
• Heaviest Liquidation Last Part of Oct. Oct. 29 Oct. 27
• Low Volume Final Panic Nov. 8 Nov. 13 Nov. 20
• Rebound Top May 1874 April 17/30 ? ?
• Bear Market Low Mid 1877 Mid 1932 ? ?

As we have been discussing, The zoom into January was prompted by the notion that a new team would end the disaster, This was too much, too soon and set up the big disappointment into early March. However, the action in base metal prices was constructive in leading the stock markets to a satisfactory replica of the spring rebound.

On the second check, two key sectors are generating strong readings on our proprietary model. On the weekly, the Summation Indicator is registering the most overbought for banks (BKX) since February 2007 which was close to the top of 122. We advised lightening up then and in July 2007 we described banks as a good "Widows and Orphans" short. The low was 18 in early March.

On the first low at 20 in February, we advised that they were beaten down so severely that they were worth a trade. So far, the high has been 37 on Tuesday.

It could take a few weeks to confirm that the top is in. However, it is time for traders to begin selling, but not yet to short. Investors should be selling.

Base metal mining stocks have also registered the most overbought since March 2008, which is also as high as the reading in October 2007. The same advice as for banks applies.

On the last check on the list, there is a vision - "Green Jobs".

According to President Obama, and many similar heads of government, economic growth will be inspired by manufacture of solar panels, electric cars, wind turbines as well as any number of sustainable and renewable energy schemes. If we didn't know better, these seem like items within a "New Economic Strategy".

Lends itself to what could be a catchy letter group (NES), and we all know that President Roosevelt ended Great Depression Number Five with brilliant invention and application of acronyms. Well, interventionists may not appreciate our sardonic description because they still believe that without special manipulations that Great Depression would still be on.

On the nearer term, the belief now is that the "stimulus" prevented the crash from running forever. It may be convenient to ignore that the same old "stimulus" was expected to keep the bull market going. What a crock!

But, back to the "New, or Green Economic Strategy" and a similar inspiration during the rebound to the high on April 17, 1930.

"A New Industrial Era In the Making"

"A New High Level of Industrial Prosperity to Come From Engineering Revisions"

"Movement of stock prices since the first of the year have been of decidedly cheerful augury, it may be inferred to the point toward trade revival in substantial proportions some months hence."

- Wall Street Journal editorial, April 7, 1930

We don't usually include policy in our checklists for a significant trend change, but it seems to be working as well.

We used the five-year bull market to 1937 to assist our call for the top in October 2007. Without going on about it we have been watching this "model" and while the fit is loose it suggests some swings over the next few months and a higher highs in August, and in November. The latter seems unlikely.

More compelling is the count of 20 months from the 1929 top to the big European banking failure of May 1931, which forced the severe part of that contraction. This time around, the twentieth month is June and it is worth keeping in mind that May often records a reversal in credit spreads to adversity.

This worked for us in May-June 2007, and it could guide again.

Energy Prices: The Downside Capitulation we got on natural gas resulted in one sharp rally to 4.45 and the subsequent decay has absorbed the oversold. The opportunity was only for nimble traders and it may take some basing action to set up a rebound.

In the meantime, the best for commodities is likely in and there is little money to be made on the upside - generally and specifically.

Gas stocks have acted better than the product, with the XNG rallying from 293 on March 10 to 386 on March 23. After correction, it made it back to 386 on Tuesday. There is not much on the upside and more on the downside. Best to be out of gas stocks.

Much the same holds for the oil patch. Crude has clocked a good run from the low 30s to 55. Last week's work suggested that 60 was possible, but with the currency change the best is likely in.

Last week we thought oil stocks (XOI) could make it to the last high at 994, but the rally stalled at the 919 level. For all the reasons outline above there is now not much up and the possibility of a lot down.

Traders and investors should get positioned for an intermediate decline in oil and gas stocks.

EURO/YEN DIVERGENCE

  • Technical divergence is suggesting a change in currency trend.
  • This divergence tends to lead declines in the S&P.

Link to April 17, 2009 'Bob and Phil Show' on Howestreet.com: http://www.howestreet.com/index.php?pl=/goldradio/index.php/mediaplayer/1183

 

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