SIGNS OF THE TIMES:

Two weeks ago, we reviewed some of the signposts from last December, which was an instructive trip down memory lane. There are some more gems:

"Based upon historical market patterns, the current commodity bull run could last until 2014 - 2022, offsetting the bear market during the 1980s and 1990s."

- Commodity expert, Jim Rogers
London (Dow Jones) December 12, 2006

"Hybrid Securities Are Expected to Thrive in 2007"

- Wall Street Journal December 16, 2006

"It's All Good"

"The investment community is treating assets of all stripes a bit like the children in 'Lake Wobegon'. They are all above average."

- Wall Journal December 29, 2006

* * * * *

"Office for National Statistical Data sourced to the Bank of England shows the volume of market loans in the banking system plunged from £640 billion at the onset of the credit crunch in August to £248 billion by the end of September, suggesting that British lenders have been hit even harder than US banks in relative terms."

- London Telegraph December 4, 2007

Stock Market:It seems that our theme of a few weeks ago is working out. This was that severe liquidity crises often cleared some of the more acute problems in November of the year that the bubble blew out, and then the markets recovered in December.

On the move, the S&P slumped 11% from 1576 in early October to the key low of 1407 on November 26, which is close to the cycle-target for late November. This essentially tested the August low levels and the rebound could find resistance in the low 1500s by around mid December.

By then, the street could be celebrating the "Santa Claus" rally and calling for it to continue through Christmas. We will be watching for enough action to conclude the rally.

Of course, sub-prime bonds led the way down, and our "Global Warning" of October 16 summed up the developing change. The sub-primes set their lows on November 23 and the AAA, for example, has bounced from 78.97 to 88.16 Thursday. We will be watching this leading indicator for the next downdraft.

Sector Comment: In early November we noted that the BKX could find support at 85 and at an RSI of 30 and then rebound. The low on the banks was 88 and momentum got down to 29 - close enough.

So far, the index has made it to Friday's 98.25 and it could run over the next few weeks to around 100. This was the panic low in August and the next dismal event will be taking out the 88 level, which could be accompanied in January-February with fourth-quarter reports. Well. One can't confidently use the term "earnings report".

Our Bank Trading Guide had a recent high of 187 on November 6 from which it has declined to 180, and going below 177 would be another bad omen for the banking sector.

From Friday to Tuesday, our base metal price index dropped 7% from 680 to 632, which is a quick move to a new low and getting oversold. Going the other way, the SPTMN has recovered from 722 to 799. It can gain a little more with the general advance into mid December.

Nimble traders were advised to do a little buying on the lows, with some regard that the decline into January could provide a better opportunity.

Quite likely, the probability of a firming dollar has not been considered by metal or stock prices.

Credit Spreads: Over the past week traditional corporate spreads such as for junk and the high-yield have been little changed, as the sub-prime bond price has rallied. However the BBB has widened a little from 157 bps to 172 bps.

Some improvement in spreads has been expected to accompany the recovery in the stock market. Then beginning in late December troubles in spreadland could resume - eventually to very serious dislocations.

The Dollar Index: As noted last Thursday, rising above 75.75 would complete the "buy" pattern and this was accomplished on Friday.

Once turned, an intermediate rally has been likely.

The following quotation provides some appropriate insight on the nature of a panic. It could be instructive on the next phase of this contraction.

"Panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works."

- John Stuart Mill. 1867