Now that the market has rallied relentlessly for some 13 months and now that the averages have recovered about 50% of their declines, decent investment opportunities are getting more difficult to find.  There are plenty of short term trading opportunities; but for those of us looking for longer term investment positions, a good buy - or “the fat pitch” as Warren Buffett would say - is rare, at the very least.  Regardless of how long the rally in the averages lasts and how high the Dow Industrial Average (the quintessential paper asset) goes, there is an end coming.  I think it will be soon.  The end always comes, and the results are not often pretty.  Just think back to late 1999 and the never-ending rally in the dot-com’s.   

Even gold (the commensurate real asset) is not throwing many fat pitches lately.  The reason is that we are in the waning years of a bull market that began in commodities - principally in gold and crude oil - 11 years ago.  There are a couple of more years left in the commodity bull, but bargains are hard to find.  Timing and prudence in price are paramount now.

I have a tool that is presented in my publication The Investor’s Toolbox that tells me whether I should be invested in gold or financial assets.  My pet name for this tool is The Long Term Gold Indicator (LTGI), and it is described, along with other handy tools, in my recent publication The Investor’s Toolbox.  All subscribers have access to a copy.

I am looking for two signals from my objective models.  One is a sell from my Palio model, which I use to call the twists and turns in the popular averages.  It has basically been long during this entire rally, and it has yet to issue a sell.  I cannot forecast when that sell might be; but when it comes, I will immediately e-mail all subscribers with specific recommendations as to what action to take next.  With the bearish condition of my other technical work, the next Palio sell promises to be extraordinarily important.  I am seeing the same background indications that told us to expect a rally to begin in the spring of 2009, and they are now looking decidedly bearish.  In fact, overall, the market looks as bearish according to these background indicators as it looked bullish back then. All that is missing is a sell from Palio.  

As the new year begins, investors face some daunting obstacles.  The prospects for economic recovery are zero to none.  At best, things might not get worse, but even that seems a long shot.  This year will usher in a new round of adjustable mortgage resets, and the bond market is beginning to show alarming signs of weakness.  Ten-year Treasuries are now yielding over 3.8%.  If the 10-year breaks over 4%, I believe interest rates will begin weighing heavily on the stock market averages. 

We caught the 2009 rally very well with our bullish stance early in the year, and our principal timing model, Palio, has been long for most of this ride.  It jumped out briefly for one day in July, and it has been tenaciously long since.  Given the deterioration I am seeing in my technical work over the past couple of months, Palio’s next sell will be of major importance.  As soon as it triggers, I will send a special alert to subscribers.

The current rally in the popular averages has been a godsend to investors with their money in paper assets, but I doubt if any will take advantage of the opportunity to move their exposure to commodity/tangible-advantaged investments.  Those that don’t will most likely find their portfolios right back where they were in March 2009 before this rally began.

The bear market that started in 2000 with the Nasdaq at 5,000 is not over yet, and it will not be over until the Dow/gold ratio falls to 2.  Although it is currently about 9.5 and although the bull market in gold is not over yet, we are no longer at the ground floor.  In order to offset market risk, timing will be more important for gold investors.  Nevertheless, we are approaching a decent buying opportunity for the metals and mining shares.  The gold bull - being long in the tooth - will require more careful stock selection as well.

Energy made a comeback with everything else during 2009, but it has been amazingly strong over the last few weeks given the surprising strength in the U.S. dollar.  Normally, crude has been trading against the dollar, falling while the dollar rallies, much like gold.  Lately, crude oil seems to have found a life of its own.  This is due to very bullish underlying fundamentals in the global crude market.  Production at the world’s major oil fields continues to decline while global appetite for energy continues to recover.  I expect to see record demand for crude during 2010 amid tighter supplies.  The price of crude is going up this year, and it will easily reach $120/barrel.

The continued recession in the U.S. will not offset rising demand in Asia for energy.  That is just the way it is.  Prices are going up, which will be a factor in igniting the next down stroke in the economy and the popular stock averages.

Investors can capitalize on this, of course, if they have the courage to realign their portfolios away from financial/paper assets and into select metals and energy companies.  I have just given our readers a new stock recommendation that I am quite excited about.  This company provides a most needed benefit to the energy sector.  In a world of ever-tightening credit, they are truly in the “cat-bird” seat.  Plus, in a world where investors have to accept bungee-jumping level risks to find yield, this company pays over 13%, although, admittedly, it is not as conservative as Treasury bills.

The Dow/gold ratio reflects the relative value between paper assets (the Dow) and tangible assets (gold).  When the ratio is high, as it was in late 1999, financial assets are overpriced relative to tangibles, and a bear will unfold in financials and a bull market will emerge in commodities.  The cycle usually lasts 17 to 20 years, and it ends when the ratio falls to 1 or 2.  Currently, the ratio is 9.5.  This is not the ground floor in the gold and energy markets, but it is not the end either.  There is still time to take advantage of the 2009-2010 rally and realign your investments appropriately.  There are still juicy income opportunities in the tangible arena. 

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Good grief!   Is this stock market rally yet another bubble?  Now that the market has recovered from its March lows, it seems that the Street is starving for risk.  When will they ever learn?  When will they ever learn?

Once upon a time, I did a six-year stint as a stockbroker for Piper Jaffray.  One of the old-timers took me aside and gave me a tip on selling stocks.  Call up your client, tell him the story, and ask him to put in a buy order.   If he hesitates, ask if you should call back once the stock moves up 10%.  Nothing sells stocks like higher prices.  The fever has gotten to the public lately.  High prices do not erase risk.  High prices are the risk.

If you are taken up in the gold rush here, remember there are times to “hold ‘em” - and this is one of those times.  There is a potential for gold to correct back to the $950 area, so be prepared for that.  There is a potential only, and the best strategy is to hold through corrections, buy into weakness, and hang on for higher prices down the road.  Although we may be close to a correction in the metals, we are nowhere near the top of the commodity bull market.

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Last spring as the market was imploding and blood was running in the streets, my work was indicating that we would see a strong rally.  My expectation was for it to begin in late February and run through August.  I reported that, in my estimation, it would be surprisingly strong and last longer than most would expect.

Retrospectively, that was not too far off.  The previous crash put in its low at 666.79 in the S&P 500 on March 6, and the rally - which I have referred to as the “Obama rally” – has, indeed, surprised the masses with its duration and extent.  At one point early in the year, I posed the question as to whether folks would be interested in selling their stocks if they could get 40% more for them than they were valued at the time.  The response was 100% affirmative.  Well, now that the averages have improved by over 50%, those same folks have become “died in the wool” bulls and believe we are in the initial stages of the next great bull market.

Such is the typical psychology of the public.  They think linearly, believing that what happened yesterday will repeat itself tomorrow.  Sometimes it does, but being successful in the stock market requires that you look at the world cyclically, always looking for the next major turn.

I have opined in the market letters why I believe the market is heading to a major high soon.  There are technical warnings – negative divergences, overly bullish sentiment, etc.  The red flags are there. 

Prices have progressed beyond my expected high in August.  Or have they?  So far, the S&P 500 of 1,039.47 was on August 28.  To date, that has not been exceeded.  It may happen; but when we look back, the odds are that we will find that that was the high.  Only time will tell.  However, this is dangerous nitpicking.  September has not typically been a friendly month to stock owners, and October is the month when the major massacres have occurred.  Those massacres were preceded by very bullish attitudes.

The red flags are waving … but I can do better.  I have two important timing models for calling the twists and turns in the popular averages.  First, my Palio model is designed to give buy and sell signals for the overall market.  As I write this, it is still positive.

My second model is specifically designed to time the Nasdaq Composite.  The reason for this focus is that regardless of whether you are invested in big caps or small caps, the generals will not get far without the troops.  The overall market will not rally without the company of the Nasdaq.  The small caps are key.  Again, as I write this, the Nasdaq Slow Tracker (as this model is called) is still positive.

Subscribers are updated on the positions of these models in every one of our reports.  They will not presage the top, but they will signal after the turn.  They are, admittedly, lagging indicators, but historically, not by much.  Bottom line – when they turn negative, it will be time to act quickly.

Folks, you have your 40% price improvement, plus some.  The S&P 500 is currently up 55% from its lows, yet it’s still a bit under its best mark in the rally.  Regardless of whether it makes new rally highs or not, it is time to at least put some protective stops under your positions.      

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The “Obama rally” is running into difficulty.  One of my most important models, Palio, issued a sell signal.  There are multiple sells on the averages I follow, and the MACD and RSI patterns are not encouraging.  It is time to get defensive.  Put stops on all financial assets.

On the other hand, my gold work looks better than it has all year.  I expect we will see gold and the mining shares move on their way in a strong rally by the beginning of August.  Historically, gold has moved counter to the stock market, and August may well be the defining month.  I look for the stock market to resume its bear market by the end of August and for gold to be probing the psychological $1,000 level.  Gold could break out to new, all-time highs by the end of August.

All one has to do to be successful in the market is to pay attention to the Dow/gold ratio.  It is about 9 currently, after peaking out over 40 in 2000.  It has further to go on the down side, which means gold will get more expensive while the Dow Industrial Average falls.  You can stick with your commodity investments until the ratio falls under 5.  Then it will be time to make plans for some changes in strategy.  Nevertheless, between now and then, commodities (tangible assets) will beat owning financials hands down.

There is no reason to complicate your investments.  All you need is to get to the heart of the commodity matter and invest in energy and precious metals.  You can further simplify your approach by investing in crude oil and gold, leaving the other metals and energies aside.

We are approaching a very nice buy point for gold mining shares, and I have listed my recommendations, along with exactly what prices you should pay for them, in the letters.  Crude oil has a little ways to go in the correction it has recently begun.  My outlook currently is to see crude come off to at least $60, where there is minor support.  That will represent a decent place to add to energy portfolios. 

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The first leg of the “Obama rally” should be about finished.  From here, my cyclical and seasonal work is pointing to a consolidation rather than a correction during May.  I expect that the S&P 500 will be able to maintain over 800, at the worst. 

My technical work is indicating that the rally will resume later in the month and progress higher until mid-July.  It is at that point when I look for a more serious correction to set in.  Prices will likely break back for a couple of weeks during July and then recover back to the July high during August.  It is a little early to tell whether we should expect the July high to be exceeded in this last move or not, but I anticipate that strength during August will be the culmination of the Obama rally that began in March.  I expect it will be followed by a serious decline back below 650 in the S&P 500.  I will be able to get a better downside target later in the year; but ultimately, the S&P has the potential to fall below 500.

These are, of course, projections based on technical work that I do.  More definitive are my objective timing models Palio and the Nasdaq Slow Tracker, both of which are currently still on buy signals.  These two models hold the key to preserving your capital and maximizing the benefits of the current rally.  When they issue their next sell signals, subscribers will immediately be notified.  You should then take on an extremely defensive strategy, regardless of where we are in the scenario outlined above. 

The Obama rally has given investors a reprieve from the damage done last fall and winter.  However, this rally will be looked back on as having been the last chance to liquidate before the next shoe drops in the secular bear market that began at the October 2007 highs when the Dow was over 14,000 and the S&P 500 was 1,576. 

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I believe, for the time being at least, the lows are in.  The popular averages are not going to have an easy time of it, but the “Obama rally” is beginning.  Remember, we are still in a bear market, regardless of what the media would lead you to believe.  I see higher prices this spring, but it will be far from a rocket ride.

Corporate America and Wall Street are going to change.  Investors are going to be looking for solid returns, and corporations that wish to raise equity capital will need to protect shareholder value by satisfying these new shareholder goals.  This means a shift in corporate goals – no more extreme executive compensation along with more money for the share holders.  Yield will be imperative for corporate America to raise equity capital in the future - and Wall Street lives on IPO’s.  There is a new paradigm afoot, but it will not be accomplished quickly.  It will be a process that will involve a bear market that destroys the old and eventually rewards those able to adapt.  In this process, I believe you will see the Dow Industrials eventually yield 6% to 7%, regardless of strength this spring and summer.  Keep this in mind.  The secular bear has another 10 years to run. 

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As far as the popular averages are concerned, the “decent” market rally I forecast in my last remarks update has come to pass, replete with the “headwinds” I was expecting.  The Dow managed to move about 24% off its November low at 7,392 before encountering stiff overhead resistance just over 9,000 at 9,175.  The occasional “air pockets” we warned of also came to pass.

That is all water under the bridge at this point.  The pining question is: what’s next?  There is a lot of talk about an “Obama bounce” or even a more sustained “Obama rally” … but is the honeymoon over already?

My work is indicating that, indeed, the step up from the November lows is over, and we should be looking for a test of the November lows during February.  One of my timing models – the Nasdaq Slow Tracker - has been on a sell since early September.  It never did join the party after November lows were established, and this bodes for further weakness.  I have a shorter term timing model appropriate for the broad market called Palio, and it issued a sell on January 16. 

My cyclical work is indicating that we should see the market fall off from about January 20 until mid to late February.  Things seem to be stacking up for just that.  I look for a test of the November lows, at the very least.  Likely, we will see those lows broken.  One of the nagging things missing from the bullish argument is capitulation.  The public has not given up hope.  Maybe it is the Obama mystique.  Nevertheless, hope needs to be broken before we can see a sustained rally.  I believe breaking the November 2008 lows will do the trick.  New lows will create the pessimism we normally see before sustained rallies.

Some of my forecasting tools are indicating a low for mid to late February followed by a very nice, three-step, sustained rally into late summer.  I expect to see timing tools like Palio and the Nasdaq Slow Tracker kick in with buy signals next month to herald the rally.  However, until we see solid technical evidence from our models, I will stick with their last signals.  They were bearish. 

We anticipated a low in October for the overall market followed by a test of that low in November.  It seems that this has, indeed, come to pass.  So, what’s next?

I have been writing in the letters and online updates about a decent rally here in the popular averages, but it will be a rally that will be working hard against a strong headwind.  I don’t expect it to be an easy go.  There will be air pockets of selling - very sudden, very swift, and often savage.  Some of my preliminary work is indicating a dip into mid-December before a resumption of strength into year end.  Although it will be a difficult journey, I expect to see the Nasdaq push to 1,800, the Dow Industrials to seek 9,500, and the S&P 500 to grope toward 1,000.

The most important aspect of this rally is that it is an opportunity to liquidate any financial/paper asset based investments that you hold.  Once we move into 2009, the bear will return.  I expect to see new lows in the averages next year.

So, how can one rescue his retirement?  First, use strength to exit financial assets.  S&P 500 has earnings of about $46.00 and a PE ratio of 17.  Earnings are going to fall next year, and so will the PE ratio.  That equates to a lower value in the S&P 500.   I would not be surprised to see the S&P fall to 500.

The second path to rescuing your retirement is to use weakness to accumulate commodity/tangible based assets.  There are a myriad of reasons that the commodity bull that started in 1999 is far from over.  The deleveraging we saw this fall wreaked havoc on all asset classes, and there is more to come in financials.  However, prices of commodities have been pushed to extreme fire sale levels and are ripe for the picking.

The credit crunch has stymied and ended exploration and development projects across the commodity sector, and this will come home to roost soon in the form of severely restricted supplies.  The government’s response to the credit problems has been to inject what some estimates put at over $8 trillion, and the process is not over yet by a long shot.  As these dollars work into the system in 2009, you will see the dollar fall to new lows, inflation will surge like it did in the 1970’s, and commodities in terms of U.S. dollars will break to new highs.  

The first place to begin is with gold.  Buy some gold.  If you have some gold, consider buying more.  Gold is up nearly 400% from its lows in the 90’s, and it will double from here - and then likely double again.  At $800 U.S. paper an ounce, tangible gold is cheap.  It’s cheap enough that the Arabs are reported to have purchased $3.5 billion in gold during a two-week stretch in November.

Currently, gold stocks are also historically inexpensive.  The gold\XAU ratio normally tops out at 5.00 to 6.00, indicating gold mining stocks are too cheap in relation to bullion.  The ratio stands today at 8.00!  You will not see an opportunity like this again – ever.

However, not all mining stocks are equal, especially in this environment.  The credit freeze has many on the ropes suffocating from a lack of financing.  It matters not how rich your reserves are if you cannot afford to develop them.  Our favorites are discussed in the Professional Timing letters and in our online updates.        

The press seems to have everyone in a good mood this summer.  The dollar is rallying (for a change), and the stock market - although not stellar - has improved.  After plunging 16% from its May high, the S&P 500 has managed an 8% bounce from lows in mid July.  The traditional summer rally has come. 

However, the move looks closer to being over than being the start of a new bull market.  The July – August rally has recovered about 50% of the previous drop.  All technicians know that is a point at which to begin looking for another reversal of trend.

I have other models that are waving the caution flag for the popular averages.  My overbought/oversold tools are pushing into extreme overbought readings, and I am seeing negative divergences beginning to set in.  It is clearly a time for caution.

As summer was approaching, we were advising our readers that we would, indeed, see the summer rally which has unfolded, but that it would only be an opportunity to sell any stocks that were not advantaged by higher commodity prices.  The time is at hand. 

We have also seen a correction in the commodity market while the dollar and stock averages have worked higher.  This sets up a double opportunity.  Sell financials and buy tangibles.  The only stocks you should hold on anything other than a trading basis; i.e., long term, are stocks that will benefit from higher commodity prices.

Our work is indicating that the next up leg in the energy and precious metals markets is about to begin, and it is time to be invested in those areas.  We have plenty of bargains on our recommended buy-and hold-list, but those fire sale prices will not last much longer.  I expect to see gold and crude oil much higher by the end of October.

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The strongest indications I am getting right now is that the stock market wants to rally.  All the classic signs are in place; but sometimes, bear markets get oversold and simply stay that way.  Another problematic element in all of this is that my technical targets for the up side are only 1% to 3% depending on the particular average you are following.  That isn’t a good sign.

As the stock market at least stops falling for a few weeks, the commodity sector - especially “headline grabbing” crude oil - is backing off.  This is causing all sorts of excitement, of course.  The media is all over it with announcements like “crude oil falls $7 – its greatest one day decline ever.”  Give me a break.  Crude oil has never been $145 a barrel either.  I doubt $7 in percentage terms is any kind of record.

Gold has been correcting ever since topping out well over $1,000 in March, and this, too, adds fuel to the commodity bears’ arguments.  I am afraid that although you will hear much to the opposite, the commodity bull market is far from over.  I fully expect to see crude oil recover to new highs and reach at least $160.00 a barrel in terms of depreciating U.S. dollars.

Coal miners have been correcting of late as well.  They are closing in on exceptional buy points. 

Gold will easily hit $1,400 an ounce, with $1,600 an ounce being my long-standing upside objective.  Frankly, I think I am wrong about $1,600 gold.  It will go much higher than that, but the truth is just too unbelievable to publish.  We can revisit the up side once we see $1,400.

There is not too much time left to use weakness in the precious metals for accumulating mining shares.  The only caveat I can offer is that you should concentrate on the major producers if you are looking for more immediate price performance.  The juniors are excellent longer term buys as many of them are extremely undervalued - even at current prices for gold and silver.  They will come into their own, but it will take a while.  I think we will need to see new highs in gold before serious investment attention will return to the juniors.  If you have patience, those on our list are ridiculously cheap.

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The U.S. Dollar Index has been locked in a trading range between 71.50 and 74.00 for the last three months.  This has been accompanied by a general correction in the commodity market, which is as it should be.  Fed Chairman Bernanke has been jawboning the dollar of late - with some minor positive effect - but not enough to push it through the top of the trading range.  I have found that even actual intervention to support a failing currency will have only a short term effect, and the Fed up to this point has not gone that far.  All in all, the dollar is weak, and nothing is going to keep it from breaking down and making a new low.  I expect to see the Dollar Index (currently at about 73.50 basis June) to break 70.00 on the down side by year end. 

Typically, the dollar will become range bound through the spring and summer before nose diving from highs in August.  I anticipate that this year will follow suit.

This is important because as the dollar has been confined in the present trading range, commodities have been correcting.  Gold was a little late putting in a seasonal high this year, but it is correcting off its March high.  I expect it will establish its next major low soon.  Likewise, crude oil is coming off its May high, and I look for something in the order of $115.00 on the down side before it completes this correction.  All is going well toward this goal; but with the fundamentals as bullish as they are, I don’t expect the selling to last long.  Crude should be on its way to new highs by the end of July.

Once the U.S. dollar breaks to new lows under 71.50 later this summer, the entire commodity complex will find renewed vigor.  The commodity bull will not be over until the Dow/gold ratio falls under 5 and/or the Fed raises interest rates over the true rate of inflation, which is currently about 11.7%.

We are advising readers to use weakness to purchase specifically recommended commodity-advantaged issues during remaining weakness this summer.        

I have been successful by always making sure I was investing in the right asset class.  Being invested in the right asset class is 85% of investment success.  We show readers how to determine this on their own, but suffice to say that currently the right asset class is real or tangible assets – commodities.  It has been this way since our technical models flipped to tangibles beginning late in 1999.

The wrong asset class is financial or paper assets.  The only exception is stocks that are advantaged by higher commodity prices, like gold and silver mining and certain energy-related issues.  The typical stock, as represented by the popular averages like the Dow Jones Industrials, is not going to fare will over the next seven years while commodities take the high road.  Bonds are another form of paper asset that will become a big loser as we progress into the next decade. 

Concerning tangible assets of late, all of the commodity averages have been on a tear, and I haven’t seen any enticing bargains.  It is hard to find attractive, low-hanging fruit when prices are this strong.  We had a field day last summer when our gold and silver stocks fell back to their respective downside buy prices, and subscribers are reaping those rewards now.  We also saw our energy favorites pull back to buy points in January-February, and those issues are beginning to advance as crude oil breaks to new, all-time highs.  Meanwhile, paper assets are looking vulnerable to further selling.

I scoured my databases to see if there wasn’t something we could invest in without chasing the commodity market on the up side - something that had been overlooked or misunderstood.  I found what I was looking for.  I found a gold miner selling for about $11.00 that was beaten down from $22.00, only last November. 

They shelved one of their projects to concentrate on another.  This news disappointed the Street, and the stock was taken out and shot.  However, the project they preferred to concentrate on is going to cost much less to exploit.  They are a 50-50 partner with a gold producer on this project; and bottom line, the project may well be THE largest gold deposit currently on the planet.  What’s more, it is domestic.

I think the Street shot itself in the foot when they took this one to the woodshed last November and December.  However, the smoke will clear, and those who buy before the crowd catches on should end up with an easy double in the event the company is bought out.  A buyout is likely; but if they can stave hungry suitors, they could become a major producer in the league with Barrick or Agnico-Eagle.

By the way, the project they shelved is actually a copper play.  I see copper moving well over $4.00 this year, and the project has not been abandoned - only postponed.  It will come back to the forefront eventually, giving this company another boost.        

The stock market is beginning a descent that I see falling back to its October 2002 lows.  That means that you should expect the S&P 500 to lose about 40% from current levels.  However, the commodity bull is intact.  Although commodity prices will not advance in a straight line, commodities will be higher and the popular averages will be lower at the end of this year.

The October 2007 high in stocks marks an important demarcation point.  This is where financial assets finally decoupled from real assets.  Up to that point, financials as evidenced, say, by the Dow Industrial Average and commodities were moving in sync - think the XAU or your favorite commodity average.  What you will see in 2008 will be remarkably different.  Financial assets will be weak, and commodities and stocks will be strong (advantaged by higher commodity prices). 

There will be selloffs, but commodities will recover and financial assets will not.  We are in a commodity bull, and it is as simple as that.

Furthermore, it is not difficult for you to tell when this process will be over if you take the time to follow the Dow/gold ratio.  Currently the Dow Industrial Average divided by the price of gold is about 13.8, and it has been descending since early 2000 when it peaked at 43.7.  Once the ratio has begun to descend, it has always fallen to less than 5.0 before the commodity bull has ended. 

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The market may continue range bound over the next year.  This year (2007) has seen the averages trading within a wide trading band.  The S&P 500, for instance, has been limited to 1,560 on the top side and 1,360 at the lows.  The implication is that stocks will offer those adept at short term trading some nice opportunities next year, but the big long term moves will be in commodities and those investments that are advantaged by higher commodity prices.

Bear markets often manifest themselves in such trading bands that can evolve over several years.  The Dow Industrials were limited at 1,000 on the top side and about 700 on the down side between 1966 and 1982.  There were two dips below the bottom of the range - in 1969 and again in 1974.  The Dow again found a ceiling at roughly 11,000 from 1999 until 2006 when it was finally able to break through on the up side.  We are now faced with another overhead barrier at 14,000; and in all likelihood, this will maintain stock prices over the next several years.

These are great trading markets, however, as long as you follow an objective timing model.  There is simply no way to double guess the market or subjectively call the twists and turns more than a time or two, and your subjective mistakes will cost more than your profits.  Only a disciplined, objective approach following a timing model like Palio can be successful.

The Dow/gold ratio topped out in 2000, and it is headed down, signaling a new bear market in stocks and bull market in commodities.  The ratio topped out in 1967 as well, signaling that a bear market trading range in financials and the commensurate bull market in commodities was beginning.  The best strategy under these circumstances will be to trade the market and limit your long term investments to tangible assets until the ratio falls back under 5 - as it did in the late 1970’s.

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The markets are revolving around the dollar, and it is sinking ever lower - as it has been for several years.  As the dollar plunges to new, all-time lows against nearly every important currency on the planet, the not surprising effect will be felt in the markets. 

This is not an immediate phenomenon; but over time as the dollar falls, commodities - especially crude oil and precious metals - will move higher in price that is denominated in U.S. dollars.  The dollar has a long ways to fall yet.  I expect to see at least another 30% decline in the U.S. Dollar Index over the next few years.

As the dollar falls, U.S. paper assets will lose their appeal.  If you buy a stock for $100 and the company grows at a rate of 10% a year for five years, the stock will THEORETICALLY be worth $150 in five years.  However, even under these ideal circumstances, you will only get back $105 in purchasing power if the dollar falls 30% (as I expect it will).

Money flows internationally these days, and stocks will be sold in “depreciating currency” countries in order to buy stocks in countries where the currency is appreciating.  Canada is a good example of this, but the currencies in other resource (raw material commodity) rich countries like Australia are also doing well.

The same logic applies to bonds with the over borrowed, deficit laden problem thrown in on top when considering U.S. Treasuries.  If interest rates are “forced” lower by the Fed - and it is not a given the Fed can actually do that - the dollar will fall faster and bonds will become even less attractive.  Bottom line, long term interest rates will have to rise eventually - and likely sooner rather than later. 

The only real “safe haven,” if such a thing exists, is in real assets.  Commodities are going to go a lot further over the next five years, and this will be caused by a weaker dollar, fewer resources in a world in transition from peasantry to modern consumption, and diminishing supply.  Soon, you will be reading not only about “peak oil” but “peak copper,” “peak gold,” and “peak raw materials” of every kind.

The course is clear.  Avoid financial paper assets.  Leave the bonds and stock averages to the traders.  Investment money should be centered on tangible assets with the continuing impact of a weaker U.S. dollar firmly in mind.

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During the last several months, we have made a case for investing in gold, and that strategy is beginning to bear fruit.  The gold party is just beginning, however, so don’t get too anxious to leave.  We should see a strong precious metal market into the next seasonal high (which is due in October).

The next strategy you should be setting down is investing for $100 crude oil.  I wouldn’t be surprised to see crude reach $100 in 2008, and now is the time to use weakness in crude to add to energy positions. 

You need to exercise some care in doing this.  The first thought is to invest in oil and gas producers; but with a couple of exceptions, this is likely not the best avenue to take.  I have one, and only one, major on my recommended list.  It has a place at the core of everyone’s energy portfolio.  Investing in the others is pure folly, for reasons we have been writing about in the market letters.

With a couple of exceptions, the Canadian energy trusts are not going to perform well at $100 crude.  The Canadian government has effectively killed this golden goose.  I do have a couple of exceptions, though.   They are select trusts that have the unique ability and circumstance to remain attractive growth issues as corporations.  The trust ‘arrangement” is done, and only those organized as corporations will provide the growth potential you should be investing for.

Look outside the producers, and invest in ancillary businesses that profit from higher priced oil.  Select refiners, shippers, service companies, etc. will show bigger gains between now and $100 oil than the folks that actually pump crude from the ground. They are all on our recommended list, along with exactly what price you should be paying for them.

Another reason I am not as excited about production as I am about other areas in the energy sector is that our next surprise is liable to be over the issue of available supply.  If supplies become diminished due to political intervention, production declines, or both, the price of crude is going to go well beyond $100.  If crude becomes dear, it will become very expensive in the same breath. 

We could have a recession due to a decline in crude oil availability and its commensurate high price.  If we have a recession along with adequate supplies of energy, I don’t see American demand for crude declining.  The rate of growth may decline, but overall demand will be higher in 2008, regardless of a recession induced by financial issues like sub-prime loans or housing.

You have to also be aware that any shortfall in U.S. domestic energy demand growth will be easily made up for by a surging energy demand in Asia and other fast-paced, emerging economies.  Couple this with the fact that production is declining in all of the major crude producing countries, and we are likely looking at the best supply/demand balance we will ever see in crude oil.  The next step is a growing shortfall between what can be produced and what the world’s appetite will require.  Invest with this in mind, and you will be picking the lowest hanging fruit in today’s market.

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I keep saying that the stock market looks vulnerable.  I kept saying that about the Nasdaq back in 1999, and yet prices kept moving higher and higher.  And then one day, the Nasdaq started down and never looked back until it had lost 78% of its value!  That is what I mean about “vulnerable.”  (From Recent Remarks June 2007)

Volatility is increasing now, and the stock market looks like it would like to drop right into October lows, which is so very typical at this time of year.

When the stock market panics - especially after making a new high - a rush to raise liquidity ensues.  This means that investors sell everything to raise cash.  The key is to put this weakness in your favor by focusing on buying tangible assets and stocks that are advantaged by rising tangible asset prices when they are sold off during general selling panics.

The best area to take advantage of currently is precious metals.  Gold is selling off into August seasonal lows, and the weak stock market is helping to push mining shares down.

The second best area is energy.  Crude prices have been remarkably strong here; and although I look for crude to pull back some, we will certainly see $100 crude oil in the not too distant future.  General stock market weakness is also pushing interesting energy stocks down to their respective levels of technical support. 

There is a buying opportunity here, and I have just added two new energy-related issues to our buy-and-hold recommendations.  One is a bit speculative, but it has very exciting growth potential.  The other is a nice dividend payer yielding 12%.  Furthermore, it is not a Canadian energy trust.  I see more problems ahead for the Conroys, and you should diversify away from that sector.

I have also just added a new silver mining company to my list of junior precious metal miners.  These stocks beat buying call options 100 to 1 for risk and profit potential.

I keep saying that the stock market looks vulnerable.  I kept saying that about the Nasdaq back in 1999, and yet prices kept moving higher and higher - until one day when the Nasdaq started down and never looked back until it had lost 78% of its value.  That is what I mean about “vulnerable.”

Focusing on the Nasdaq, there have been persistent negative divergences for the last several months.  Sentiment is bullish (the election cycle et al), we are seeing what may be a double top this month, and we are in the worst six-month period for the market.  Furthermore, my Annual Asset Allocation Model is advising that the best place to be is real assets rather than financial assets. 

Bottomline, although the Nasdaq may continue to work higher, it is still “vulnerable” to a collapse.  You have to invest accordingly.  Financial assets like stocks and bonds can be approached on a trading basis, and we offer specific trading programs for our readers.  However, long term investment positions must either be in real assets or stocks that are advantaged by higher commodity prices.  A list of our long term recommendations can be found on Page 6 of each monthly letter (check the archives for old issues).  The list is continually updated on our Tuesday and Thursday online updates. 

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The stock market is downright spooky.  It gropes its way higher, only to become overbought and crash.  The “crash” part only lasts a day or so; and once again, prices begin climbing. 

The news is not all that great.  Consumer spending was down in April, according to the most recent report.  Some of the major retailers saw significant declines in sales.  The International Council of Shopping Centers, the ICSC, reported that same-store sales were down 2.3%, which was the largest decline on record.  ISCS’s chief economist said, “It’s an ugly picture.  The 2.3% decline is a wake-up call that something fundamental is going on.”  He apparently is not buying into the excuses being given on the Street, such as it was all “due to a shift in the Easter calendar.”

The next bit of news that crossed the wires was that consumers have boosted their borrowing and that consumer credit has increased at 6.7%.  Perhaps it is just me, but this doesn’t jive.  It may be a bigger wake-up call than the ISCS economist realizes.

Still, the stock market blazes along like there will be no end to paradise.  Maybe there won’t be.  The Fed has been increasing liquidity, but the “consumer” - who accounts for nearly ¾ of the economy - is stretching his finances to the limit.  There will have to be a reckoning.

How soon?  No one knows.  I like to remind folks in situations like this - reminiscent of late 1972 and late 1999 - that sometimes it is not wise to stay too long at the party.  The party is loud, the revelry is intoxicating, and you hear the sirens … but maybe you will stay for just one more drink?  Not a good idea.  

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Once in a while, I get ambushed with the question: “What should I buy – right now – today?”  This is not aligned with my investment philosophy that calls for paying the right price as well as buying the right stock in the right sector, but it is an interesting exercise. 

I like to term it this way.  If I were to pay too much for something, what would I buy?  The implication is that if I were willing to forego timing and have the constitution to sit through a correction, what would I be willing to pay too much for – what has that much promise for the longer term?

If that were the question posed today – what to buy even if you were paying too much – it would be gold. 

The dollar is sliding down a slippery slope of late.  The U.S. Dollar Index has a low of 80.00 that has been support for years and years.  It hit 80 in 1978, and several times since - each time being able to recover to a greater or lesser extent.  Here is a chart from chartsrus.com which illustrates how important the 80.00 level is.

We are approaching the all-important 80.00 level once again; and frankly, I expect to see a brief bounce.  I also expect to see the almighty 80.00 barrier broken some time this year - perhaps sooner rather than later.

There is one relationship in the market that is cast in stone, and that is when the dollar falls, gold will rise.  When the Dollar Index finally breaks through the 80.00 level and begins its move toward 60.00, gold will go ballistic.

What should you buy if you are going to pay too much?  Gold.  Investing always takes patience, but gold is as near a slam dunk investment as you will find in this market.

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I haven’t been this excited about precious metals since the lows in May 2005.  Gold was selling for about $340/oz. and the XAU was only 80.00 back then.  The basis for my excitement is a recent reading from my “Simplicity” gold timing model. 

On February 27, the model registered a reading of 4.99.  Simply stated, when the model moves over 5.00, precious metal mining stocks are slam dunk buys.  This doesn’t happen very often; but when it does, it is time to put everything else aside and buy gold and silver stocks.

Subscribers were alerted in mid-February that we expected to see a high form in the metals late February and see precious metals correct during March.  That forecast based on cyclical studies is still on track.  However, this correction may be extraordinary in that it will be accompanied by a Simplicity buy signal. 

We will be keeping subscribers up to date, of course.  We have pointed out our favorite mining companies, and I also provide readers with downside buy prices.  These are prices under today’s market where you should be able to buy during March weakness.

Putting the fine tuning aside, the best bet for the next month is to take advantage of any selling in precious metals for accumulation.  I have no doubt that gold will double from today’s prices, and silver will perform better than gold over the next three years.  The real big money will be in selected mining companies.

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The stock market has been rallying since last summer, but that does not make the market look more bullish.  I have outlined some recent observations in the Model Indicators under the stock market section, but each day as the averages creep higher, the risk levels grow.  The fact that no one seems to find the market risky makes me less comfortable. 

If I had to select one area of the stock market that looks like a screaming buy, it would be energy - and specifically, the Canadian energy trusts.  These have been beaten up so badly that some are paying nearly 20% dividends!

The political climate is beginning to improve for the trusts as the issue of taxing the trusts advances through the Canadian legislative process.  There is a good chance that something in the proposal to tax the trusts will be amended by the time this becomes law.

There is talk of extending the tax hiatus to ten years from the four proposed.  There is some talk of exempting the energy trusts altogether.  Nevertheless, the trusts are priced as if crude were $30 a barrel and as if the proposal to tax the trusts were a done deal. 

This looks like as close as you will ever get to buying straw hats in the winter.  The trusts look like the mother of all speculations, and we have listed the ones we like the best and exactly what price we recommend readers pay for them.

Related to a weak dollar, the precious metal market is looking extremely attractive at current levels.  In the January monthly letter, we recommended several precious metal mining stocks as well as prices at which readers were advised to make their purchases.  All of them dropped to those buy prices.  Some have bounced, but a few are still attractive for purchase.

The bottom line is that crude oil, natural gas, silver, and gold have all corrected significantly, but they now appear to be working on forming lows.  Investors have the opportunity to buy here before the next rally - or wait and chase prices on the up side later.  It is much better to buy low and sell high than buy high and try to sell higher.    

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This has been a remarkable stock market rally.  It is now about six months along with nary a correction.  Yet every day when I review my technical work, the conclusion comes up bearish.  I think the only thing driving stock prices higher is higher prices.

It is reminiscent of December 1999 except the stock market had some serious wind in its sails back then.  Today’s market is more of a drifter.  It isn’t really strong, but it’s working higher because it doesn’t seem to want to go down.  Buying begets buying sometimes.

I have an explanation.  The pattern we are seeing is evidence of professional distribution.  The pros sell into strength until prices begin to break down.  Then they step aside, pull the selling pressure, and let the Street work prices back up.  Once the up move gains some minor momentum, the pros step in and begin selling again.  Finally, the selling pressure grows to the point of breaking prices again, and the pros again stand aside.  The cycle has been going on since last summer.  The longer the distribution goes on, the worse the following decline usually is.

Stocks will no doubt continue this pattern through the month of December, and perhaps into January – February like they did in 1999-2000.  However, the break is coming, and you need to act accordingly.     

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The market’s worst six months are May through October; and finally, we are approaching the end of that time frame.  All in all, this year has been virtually flat.  There has been some weakness and some strength, but there’s been no real progress.  The worst six months is not over until the end of October, though, so there is still time for the market to turn and bite over-confident investors.  In fact, I have cyclical highs due soon, and there are plenty of negative, bearish divergences to point to.  Caution is the best strategy for now.

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The August rally has been pleasant as all the ships seem to have risen with the tide, including our energy and precious metal stocks.  However, although I expect the metals and energy – indeed, all of the commodity advantaged stocks - to do well into the spring of 2007, I can’t be as optimistic about the popular averages.

The S&P 500 is nearing overhead resistance at 1,320, and the Nasdaq is closing in on stiff overhead resistance at 2,200.  My technical work, including MACD and oscillation studies, indicate that this rally is nearing an end.

I can’t remember a decent September for the stock market overall, and all of the worst calamities have occurred during October.  October, 1929 and more recently October, 1987 stand out as hyper examples.  Once we pass through this period, this trial of fire, perhaps then the market will be once again be purified and purged of its excesses enough to set up a decent year-end rally. 

My advice is to take the seasonal tendencies seriously.  We are still working through the worst six-month time frame for market performance - the months of May through October.  Once the next two months are over, we can reconsider our bearish outlook.  Until then, you should consider that the bears are in charge.      

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The stock market is performing as you would expect during the months of May through October - the worst six months of the year.   The exceptional factor this year is that the long term secular bear market that began in March 2000 - and was interrupted by a cyclical bull market from lows in October 2002 to the highs set in April of this year - has resumed. 

The signs are apparent, not the least of which are the extreme oversold readings in the 10-day Arms Index, which we talk about in our July mid-month letter.  Bull markets don’t get this oversold, and this market is getting oversold and is staying there.

Another warning is coming from the recent one day “pops” we have seen in the Nasdaq and broader market averages.  There have been several instances of the market jumping 2% on a given day, only to see the sellers quickly enter the fray and push the market right back down again.  A market that cannot get any traction is a bearish thing indeed.

A third bearish element is that the Nasdaq is leading the larger caps on the down side.  Unlike the S&P 500 or Dow, the Nasdaq has broken its lows set last October.  The Nasdaq rules.  There will be no bull market without relatively strong participation by the small caps.

There is more to come on the down side as the “worst six month period” drags on.  August is typically a very poor month, and I have never been able to produce significant profits during September.   October, of course, is the month that you will usually see the market crash into important lows, but we have a good deal of time and distance between here and there.

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The most exciting thing to talk about is the signal we just got from the Simplicity gold model.  It issued a buy for precious metal mining stocks on June 13, and it is telling us that the correction in the metals is all but over. 

I don’t expect to see the next rally spring straight from the recent lows.  There may still be a little time left to purchase gold and silver stocks.  Some are still selling under the maximum buy prices (downside buy prices) that we publish, along with our long term buy-and-hold recommendations.  However, the next major move in the metals will be up.

The broad stock market is due for a reaction (correction on the up side).  By traditional measures, it got extremely oversold.  Some sort of bounce is in order.  We are also closing in on the end of June, beginning of July time frame. 

The popular averages tend to strengthen around the end of one month and beginning of another.  There is also the tendency to rally around the 4th of July holiday and the tendency to see some sort of “summer rally.”  The stage is set for a bounce, and such rallies can be very flashy - especially if they occur within a bear market (as this one will).

It will be a trap, so do beware of getting all caught up in any bullish enthusiasm.  If you buy the rally, you must be early and quick to take your profits.  Only the most nimble of traders should participate.  Most investors would be better off liquidating stocks that are not driven by higher commodity prices.  This might be the last chance you get to clean up your portfolios before things turn really ugly this summer.

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Investors are just people, and people seem to be hard-wired to project the immediate past into the long term future.  If prices rose yesterday, they will rise forever.  If they have risen for several weeks, then they will surely continue to rise forever.  The truth is that this logic is completely backward.

The recent precious metals market is a good example.  About the time you read about how good gold is in everything you pick up, you should be aware that the party is over, at least temporarily.  That is simply how the market works.  Warren Buffet recently said that “the wise do early what fools do late.”  That’s good wisdom from the sage of Omaha.

We purchased precious metal stocks a year or more ago for the price appreciation we are seeing today.  Folks, it is simply too late to jump on board.  You can buy high and sell higher, but my experience is that normally you will have to sit through a gut-wrenching correction in the interim.  Most folks will be as willing to sell at the bottom of the correction as they were to buy at the highs that preceded it.  Let the market work for you.  Don’t chase strength.

I have been advising readers to use strength to sell stocks that are not driven by higher commodity prices.  There has been plenty of opportunity to do that.  I have been instructing readers on the “worst six months of the year” - which runs from May through October.  If you simply didn’t have any money in the stock market (and by that, I mean the traditional stock market - the Dow and S&P 500, for example) during these months, you would not have left any money on the table over the last 55 years.  In fact, you would have avoided a loss.

Sy Harding in his book Riding the Bear tweaked this a bit by applying MACD (Moving Average Divergence Convergence) to the S&P 500 to better define the time to sell when entering the worst six-month period.  This simple technique improved the timing by a wide margin. 

The bottom line is that MACD issued its sell for 2006 on May 12.  From here on, profits are going to get difficult to come by, at least until the best six-month period begins in November.

Sometimes all the ships will fall with the tide, and the commodity issues may well fall here with the overall stock market.  I am looking for a correction in the metals.  However, any damage to commodity-advantaged stocks like precious metal and raw material mining as well as energy production will be temporary.  Commodities will recover; the rest will not.  If you need any history to study, think 1970’s.

The worm has turned.  You should be sitting with cash from issues sold which are outside the commodity arena.  Be ready to buy resource stocks on our buy-and-hold list at the published downside buy prices.  See Page 6 of the monthly letter and Page 3 of the Tuesday and Thursday hotline reports.    

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The Dow Industrials are nearing all-time highs; and if they manage to probe to the 11,700 level, you will hear a lot of fanfare.  My advice is to ignore the celebration and take a look at using the enthusiasm to liquidate non commodity-advantaged stocks from your portfolio.

Our Annual Asset Allocation Model is still solidly advising us to have our money in tangibles (as it has for the last few years).  The Dow may advance another 1,000 points – perhaps another 8% or 9%.  If it does, I doubt anyone will sell.  They will buy more at the top and hold on until the next bear market lows come in.  The real danger is that the averages might stall here, or turn lower before making new highs.

The S&P 500 sells for 30 times earnings.  There has never been a bull market that has begun from such high levels.  Housing is beginning to soften, and that will have a negative impact on consumer spending.  Consumer spending is directly correlated to the S&P 500. 

As consumer spending wanes, corporate profits will begin missing their projections and the S&P earnings multiple will fall.  The bottom line is that a bear market is coming this year, regardless of whether the Dow makes new highs or not.  It is time to prepare.

The U.S. dollar will also fall as U.S. stocks become unattractive.  The good news is that commodities will remain in the bull market that started a few years ago.  The full profitability in commodities has yet to be realized, by a wide margin. 

We talk about the Dow gaining 9% against mounting risk levels.  Gold will easily advance another 50% from current levels, with additional gains very likely beyond that.  Precious metals offer a very exciting profit potential, and the recent corrections in gold and the mining shares offer a decent opportunity here to climb on board.

As the dollar falls, the Canadian dollar - which has done very well of late against the U.S. dollar - will advance further.  I fully expect to see the Canadian dollar on par with ours.  Likely, it will go to a premium by the end of the decade.  Meanwhile, Canadian raw materials will be in ever-increasing demand - especially crude oil and natural gas.  The recent drop in gas prices is offering investors an opportunity to make some very remarkable investments in Canadian energy.

Bottom line, stick with commodity-related investments - especially energy and precious metals.  The end of the commodity bull market is not in sight. 

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The entire market seems to be coming under pressure.  A drive to raise liquidity is mounting, and strength is being met with sellers.  The problem seems to be widespread and general.   The popular averages look extremely vulnerable. 

Late last year, I forecast a top for the market in January.  Aside from the fact that progress on the up side has been labored at best, the top I was looking for has not showed up yet.  Of course, we won’t see that top until the market is falling, and then it will be too late to do anything to protect your portfolios. 

My recommendation is to use strength to liquidate any non-commodity driven investments you have.  If you cannot bear to part with them, do yourself a favor and put sell stops under the market.  In time, I think you will be glad you did.

Our gold and energy investments are coming under pressure of late as well.  This is not unexpected.  We urged readers in our remarks last month to expect a correction in the precious metals.  The correction is under way now.  It has a bit more to go in time and distance, but it will lead to a superb buying opportunity by this spring.

The energy sector is also correcting, and we are recommending purchases of some of our favorites at current levels.  Crude oil is backing and filling; and barring some surprise catastrophe in the Middle East or from one of the other OPEC producers like Venezuela, crude will base here for some weeks.

Natural gas looks under-priced here at $7.50 basis April.  It could probe to the $6.00 level, but that would be a remarkable bargain and, thus, would be highly unlikely.  The most reasonable outlook is to see natural gas find some footing soon.  The stocks may give us a clue as I expect they will turn higher first. 

We are in a good position here to accumulate energy investments in anticipation of the next highs.  I expect crude will move over $76.00 and natural gas will hit $15.00 by this time next year.  Of course, it will then be too late to make your investments.

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My work with gold and silver is throwing up a caution flag.  The message is that we should not chase the precious metal stocks.  A correction is due.  I don’t see anything that indicates a correction will be severe enough to try and jump out and back into our long term investment positions.  Nevertheless, there will be better buys for those who are patient. 

We have listed current recommended stocks in this sector along with specific downside buy prices for those stocks.  The best course of action is to put open orders in at those prices, sit back, and wait.

The energy sector - our other favorite - has already corrected to some extent.  It is interesting that no one seems to be talking about crude oil, which is closer to $70 these days than $60 where it was but a few weeks back.  Perhaps that is because natural gas prices have been softer than expected.  The cause is an unseasonably warm winter – at least so far.  Nevertheless, natural gas is still just south of $9.00 and is anything but cheap.

I expect to see natural gas turn higher soon; but while it is in the doldrums, it is a great time to put some money into gas stocks.  I have a particular favorite that is stubbornly stuck at C$22.00.  It is a 100% natural gas producer, and it pays just shy of 13%.  I have my plan laid out for this one.

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The most important thing I can tell you as the old year ends and a new year begins is that there was a dynamic shift in the markets in 2000-2001.  This shift was a move from financial assets to tangible assets.  A new bull market was born in commodities.

That bull will have three phases.  There will be an initial value phase when commodities - due to excess inventories, underinvestment, and a decline in demand during the previous bear market - are really too cheap.  The pendulum swings; and in the value phase, commodities overshoot a fair price and simply become too cheap.

This phase of the bull is now over.  The second phase has begun. This is the venture phase when commodities become attractive to the investment crowd again.  You will be seeing acquisitions and merger activity heat up as surviving companies begin using the profits accumulated during the value phase to purchase weaker companies with good reserves.  As this phase of the bull progresses, institutions will begin to shift their “mix” toward a bigger exposure in commodities.  The public will join the party as the Street sees commodities as mainstream once again.

It is at the beginning of the venture phase that early investors can find rewarding, longer term investment opportunities while the risk is still low.

It is the time to get out of the stock market per se and shift your investment focus to commodities.  I am listing my favorites in each issue.  I am concentrating on those commodity-related stocks that will beat the bear, and I have just recommended what I think will be the best mutual fund to hold in 2006.

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So far this month, the stock market has been rallying - as we advised it would - from lows set in October.  This is a trading rally only, not the beginning of the next bull market.  I do feel that we could see a lackluster affair in stocks from now through the end of the year; but at this date, the popular averages are bumping into stiff overhead resistance.

I will be going into some detail in my December monthly letter as to how 2006 stacks up; but suffice to say, it isn’t bullish for stocks.  However, it is far from the end of the road in commodities.  The closer we get to 2006, the more this period looks like 1973-74. 

Our Annual Asset Allocation Model has renewed its advice to concentrate your investments in tangible assets and only stocks and bonds that are driven by higher commodity prices.  The correction in energy over the last two months has set up what amounts to a second chance for investors to buy energy issues. 

The complex looks close to bottoming out, and I suspect that the stocks will lead crude and natural gas on the up side.  The November letter has a deeper discussion on this matter, as well as my favorite natural gas issue.  It not only has recently increased its dividend by 9%, but it pays over 14% as well.

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During September, I got an unusual number of e-mails from folks complaining about my admonition to wait for the energy stocks to sell off before buying.  It seems that everyone wants to chase strength.  However, my technical work was calling for some profit-taking; and at last, we are seeing these issues come down a little.

I have a list of my recommended stocks as well as downside buy prices for each one.  This list is included with each of our Tuesday and Thursday hotlines and in the monthly market letters.  Finally, we are seeing these stocks head to some decent levels where longer term investors can afford to add to their energy positions.

I have been warning that the precious metal stocks were also overbought and due for a correction.   I believe that correction is unfolding as October unfolds.

I titled the October monthly newsletter “Commodity Bull Market Far From Over,” and I adamantly believe that.  Every market will have its ups and downs.  The rallies will come and then will begin to feed on themselves as impatient investors begin to chase yesterday’s prices. 

Inevitably, this process reaches a level when traders begin to take profits and prices sell off.  Once the sellers are finish, savvy and patient investors move in, and the rally phase sets in once again. 

The market cycles.  The trick is to be in the right sectors and have the patience and emotional control to buy into weakness.  We are closing in on another buying opportunity in both energy and the metals.  The trick is to brush aside the bearish rhetoric you hear from the media and buy at appropriate support levels.

Don’t panic!  The commodity bull market is far from over.

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Energy has taken the headlines.  Hurricane Katrina is also a story about energy.  It might not have been in the past, but the greatest economic problem we face today is soaring energy costs, and this storm exposed just how delicate our current energy supply/demand situation is. 

Add to rising energy costs higher taxes, rising education expenses, and increasing health care costs and you can see that the consumer is getting squeezed pretty hard now.  Katrina will also be coming back to all of us in the form of higher insurance.  Furthermore, food prices will be increasing in price this winter as transportation costs are passed on to consumers.  It will be a tough winter for the consumer.

With some two-thirds of GDP on the back of the consumers, the question is, where will they be spending their money?  Higher costs for non-discretionary items will translate into lower demand for those things the consumer can do with out.  This will include a damper on the housing market and all of the related industries that are tied to the housing boom.

It is late, but not too late to get your financial house in order.  There are still profits to be made with energy investments - if you are patient enough to wait for dips before buying and focus your investments on the best buys.  Current natural gas prices have not been fully reflected yet in many energy trusts that have significant natural gas production.

Investing in energy at this point is definitely a matter of coming in late in the game, but precious metals have yet to fully reflect the rise in other non-renewable resources, including oil.  Normally, gold has sold for 16 times the price of a barrel of oil; but today, this relationship stands at 6.8 times.  This means that you can exchange a barrel of oil for more gold than any time in the recent past.  Gold is truly undervalued. 

Consider if crude were to fall to $50 (very unlikely) and the ratio was to revert back to its mean, gold would sell for $800.  If the ratio were to only recover to 12, gold would sell for $600.  The most likely scenario would be for crude to move over $70 toward our next upside target of $76 this winter and for the ratio to move back toward its average of 16.  I will let you do the math.

The stock market is too high, and it has some serious downside adjusting to do.  The energy sector has been discovered; and although not finished on the up side yet, it offers no real bargains at today’s prices.  Precious metals, on the other hand, should be seriously considered.  Now is the time to accumulate before the Street discovers that gold and silver have been left behind.  

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The stock market looks like it is about to put in a major high.  I have cyclical highs due right now and again in August.  Likely, we will see a July high followed by some profit-taking and then a test of that high in August.  It could then be a move lower through the end of the year.

I am working on a new timing model for the averages that we can use to call the market a bit better, and also use to trade the Rydex funds.  I will have more in future letters on this; but suffice to say, the model is currently long.  I will let subscribers know the minute it triggers a sell.

In the meantime, the market rally looks like it is on borrowed time.  Stocks are overbought, the McClellan Oscillator is breaking down, and my application of MACD is setting up for “second sell” signals (very important signals).  It may well be time for traders to use strength to take some money off the board.

I have been advising against chasing the energy stocks.  Why do investors wait until stocks take off and then insist on chasing them?  I prefer to buy weakness. 

The last selloff in the energy issues gave us plenty of opportunity to buy at prices that enabled us to manage risk.  Buying the highs and chasing strength is not a good way to manage risk.

I think energy is going higher, but the next step will be for crude to settle back to about $57 basis December futures before basing for the next move that should take crude to $76.  There is plenty of up side in the energy sector to come, but now is not the best time to buy.

The better choice on my radar screen right now is gold.  I expect gold to throttle back to $420 basis December futures, and it is close.  I look for the XAU to also fall back a bit more, with 85 being a downside objective near term. 

The potential in gold and silver is huge - for all the reasons described in past letters.  The trick is to buy at the right time and at the right price.  The time is near, and the latest downside buy prices for our recommendations are listed on our list of buy-and-hold stocks.

I have just recommended a new junior gold stock that is truly exciting. It sells for about $1.00 U.S., and it has enormous potential.  If it merely doubles, I will be disappointed.  Bottom line, though, is that you should be eyeing your favorites and using further strength to accumulate.

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The phenomenon is ancient, but Joe Granville made it famous.  At least it was famous back in the 70’s when this simple chart feature came to haunt investors.  What I am talking about is the “Granville Hook.”

Here is how it works.  First, you have a rally like the cyclical bull move we have seen since the lows in October 2002.  Then a high forms, followed by a correction - like we have had since the averages topped out in December of last year. 

Once this phase of “profit-taking” is complete, the market resumes its rally.  This rally is persistent and lasts long enough to pull in all the pessimists and sidelined money.  Investors are encouraged again, and excuses for a new bull market abound in the media.

That is exactly where we are now - closing in on the end of the Granville Hook rally.

So, how do we know we are not on the road to those long past projections of Dow 100,000 espoused as the new millennium was approaching by Charles Kadlec and others?  We know because of technical tools that I keep, like my Annual Asset Allocation Model that shifted to tangible/commodity assets several years back and put us buying energy trusts paying 15% dividends when crude oil was $20.00.

Because the Q-ratio that we discuss in our booklet “The Long Cycle” tells us that financials are still overpriced in relation to tangible assets.  This booklet reports several studies that support the notion that we are ending a cyclical bull market (which is but a correction in an ongoing secular bear market) and that by this fall, the stock market will be solidly back in bear mode.  It is also because tangible assets including real estate, coal, crude oil, natural gas, gold, silver, copper, etc. are in strong up trends.

This rally will not give up easily, which is another signature of the hook, but it is not destined to make much more headway on the up side either.  Enjoy the summer, frustrating as it will be for the bulls; but have your house in order by early August.  From that point on, our work indicates the hook will be set and the market will resume its journey to new lows.  A 1987 style crash - while not assured – might be possible.

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The stock market just can’t seem to get off the mat.  We get a nice strong day; and then the next day, the sellers come out of the woodwork.  This is not good. 

The stock market does not follow the economy, so you can ignore all of those economic reports the government conjures up to make you think you are better off now than during the last administration.  The stock market forecasts the economy.  It doesn’t follow it.  I think it is speaking loud and clear, if you will only listen.  It is saying we are heading for a recession, and it will likely be a doozy.

The risk of investing long term in the stock market far outweighs the potential rewards you can expect to earn.  Interest rates are moving higher.  We are awash in debt, which will be adjusted.  We are still at war with ballooning deficits, and we are entering the worst six months historically in the stock market. 

Since 1950, according to The Stock Trader’s Almanac (www.stocktradersalmanac.com), $10,000 invested in the Dow Industrials would have lost money during the months of May through October.  During the other six months, an investment of $10,000 would have appreciated magnificently.

We are not looking at rosy prospects for buy and holders for the next six months, but there are exceptions – namely, stocks and mutual funds that will benefit from higher prices of raw materials.  Commodity prices will continue to climb, likely for the next 10 to 15 years.

China and other emerging Asian powerhouses are at the root of some of this.  The Fed and their crusade to weaken the U.S. dollar are at the root of the rest.  I have been hearing for a year now that the Chinese economy is going to cool off, but their first quarter numbers indicate they are humming along with a 9% rate of growth.  I see no ice yet, and I won’t until they let their currency float. 

Even that may not have the cooling effect that many envision.  China is on a mission to become a world class economic - and military - power.  I think they will be buying resources and companies that own resources for the foreseeable future.  You can tag along with investments in energy production and precious metals - especially silver.

Bottom line, don’t get all bullish about the stock market.  The best months are behind us.

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I simply don’t think the stock market will live up to its bullish “5th year” reputation this year.  In review, the stock market has been up every year ending in 5 since 1865.  Every year.  However, if we look back to 1955 and 1845, we see that the market fell in those 5th years of the decade.  Thus, every year ending in 5 has not been a winner. 

The issue is further complicated by the strong statistical tendency called “regression to the mean.”  Malthus actually discovered this when he was trying to isolate pea seeds that would produce extraordinarily large and small plant varieties.  He planted the biggest peas, expecting to get big peas in return.  However, the biggest peas he planted produced peas smaller than the average, and extraordinarily small peas produced peas that were above average in size.  This is called regression to the mean (average). 

We don’t know what the average win/loss ratio is for 5th years of the decade, but we know that nothing in the market is “always.”  Quite simply, the market is due for a down 5th year, and I believe this is it.

So far this year, the market has behaved in a very distributive pattern.   It has no real direction, and it has very choppy day-to-day action.  I have pointed out the ominous double tops forming in the Value Line Arithmetic and S&P 500 averages (see Model Indicators – Stocks). 

New high- new low activity is turning decidedly negative.  Various market timing models that I follow are turning negative.  The technical signs of a bear market are becoming more frequent.

The stock market anticipates and discounts the future.  I believe it is beginning to discount and anticipate a coming recession, which is being brought on even now by high crude oil prices.  We are not out of oil, but we are definitely out of cheap oil, and professional investors are only beginning to adjust for this. 

The next recession will be accompanied by rising commodity prices, and the pressure of higher energy costs will alter consumers’ spending habits drastically - not tomorrow, but soon.  In the meantime, the stock market will be reflecting this change.

The cyclical bull market that began in October 2002 is over.  The secular bear market that began in March 2000 when the Nasdaq tipped down from its high at 5,000 is about to resume.

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It looks like the investment world is wising up to the wisdom of investing in Canadian energy trusts.  This represents a good news, bad news story for us.  The good news is that we are not only earning fabulous dividends of 14% and 15% from our original purchases, but we are seeing some spectacular price appreciation in our stocks as well.

The question is whether this party is all but over.  I can say that we are no longer on the ground floor with these investments as we were a couple of years back when crude was selling for $20.00. 

My advice is twofold at this point.  First, look for interesting niche plays in this sector.  Second, buy into weakness.  It always makes me nervous when any investment becomes headline news and all the rage with the talking heads in the media.  Be patient.

My current favorite is Paramount Energy, which is an exclusive natural gas producer.  Paramount still pays 15% annually at today’s price of C$17.50 Canadian, or about $14.00 U.S.  Plus, they pay monthly.  It doesn’t get much better than that.

Natural gas is still sitting at $6.00 while crude oil has recovered nicely to $48.00 from its recent base at $40.00.  Natural gas will not remain relatively cheap as crude oil becomes expensive. 

I have just updated our buy-and-hold list, which indicates exactly which of our trusts should be held and which ones should be purchased and at what price.  We are not at the ground floor in the energy trusts, but there is still a big ride ahead before we reach the top. 

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It is difficult to find anything that looks like a true bargain in the markets these days.  I am talking about something priced at mouth-watering prices.

Crude oil has been rising for three years now.  It moved from about $28.00 in January 2004 to $48.00 lately.  That is not to mention that it corrected recently from highs at $55.00.  Our coal company investments have been on a constant upside tear.  There have been no significant corrections there to take advantage of.

I have no doubt that commodities will be the winning asset class for the remainder of this decade.  Of all the commodities one can choose to invest in, energy, crude oil, coal, and natural gas offer the very best potential reward with the lowest risk. 

Are there any ground floor opportunities left in this sector?  Well, perhaps not ground floor, but certainly first and second floor opportunities exist.

Although crude has moved significantly higher during 2004, natural gas has behaved quite differently.  It has been volatile - no doubt about that - but most of the year, it has traded around the $7.30 level.  There have been forays to $8.50 and then declines to $6.00.  Today, as crude is once again coming alive and heading for $50.00, natural gas is dead on its butt at $6.00.

I expect to see crude exceed the $55.00 highs set last October during the summer of 2005.  I look for $60.00 by year’s end, and I think that estimate is likely low.  A 2005 high of $76.00 is more likely.  The “Johnny come lately” as the market is positioned today is natural gas.

There is a typical ratio between the price of natural gas and crude oil of 6x.  Crude should sell for 6 times the price of natural gas.  If gas is too cheap, commercial power users will tend to shift to gas.  With crude back to $48.00 from its late 2004 low of $40.00, gas is well behind the curve.  At the 6x ratio, gas should be selling for at least $8.00.

Natural gas looks to be setting up for a dynamic rally, and I am telling subscribers about a great looking Canadian energy trust that exclusively produces natural gas.  It also pays an annual dividend of 14.2%, and it pays monthly.  These dividends will also tend to increase as the value of the U.S. dollar falls against the Canadian dollar.  Over the last three years, the dividends on our Canadian trusts have increased over 30% due to the falling dollar alone.

It is time to get on board and invest a little money in natural gas.       

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Crude oil crash – a blessing or a curse?

In October, I began warning investors to hold off buying energy stocks.  Crude and natural gas looked like they were ready to top out.  Yet, I was getting all sorts of e-mails from folks over-anxious to get on the bandwagon.  Everyone always wants to buy the highs.

We have provided specific buy prices for our select group of oil and gas stocks for the last three years.  This list of longer term buy-and-hold stocks also includes downside buy prices, which were well under the current prices as the October-November buying frenzy was building to a head. 

My advice, however, was clear.  Wait for weakness before buying, and put in orders under the market at our buy prices on a “good ‘til cancelled” basis.  Then sit back and wait.  If one were looking to add to previous positions, the dividends on our Canadian energy trusts would pay them handsomely for their patience.

I was wrong about the correction in one aspect.  I thought that crude oil would back off to about $46.00 and then progress laterally in a trading range.  Instead, prices have basically crashed through support at $46.00.  To date, they have fallen as low as $42.00.

 Chart courtesy of www.futuresource.com

The good news is that it is time to begin buying these stocks again.  A couple of my favorites have already hit our downside buy prices, and others on my list are getting close.

Some of those voices that were so adamant about buying at the highs are now worried that dividends will be cut once crude oil gets to $30.00.  I have been in this business long enough to know that anything is possible, but $30.00 crude is a stretch - especially when coming from the same folks that were forecasting $100.00 crude at the highs.

This is how market psychology works, and it is why you need to buy into weakness and sell into strength. 

The fact of the matter is that nothing has changed in the supply/demand picture for crude.  World production is beginning to peak out.  China’s appetite for energy is exploding, both from the need to fuel their manufacturing operations and the need to fuel their rising standard of living.  India is another enormous market for energy as are all of the emerging Asian tigers. 

Americans are not close to giving up their SUV’s or air conditioning yet.  I believe even if we see Western economies cool off next year (a distinct possibility), global energy consumption will still continue to increase.  The increase could be less than the annual increase over the last several years, but it will increase nonetheless.

On the other hand, supply is waning.  We hear of new supply sources such as Russia, but those potential sources are far from developed and distribution systems are well into the future.  New global development cannot keep pace with the rate of depletion, which is exactly why we are at or very close to a peak in world production.  As global production begins to decline and energy usage increases - especially in countries like India and China - the price of crude oil will continue to rise on a longer term basis.

The depreciating U.S. dollar is a factor in this as well.  Oil-producing countries are sophisticated enough to know that they must require more dollars per barrel if the value of those dollars are going to decline.  Weak dollars equate to higher oil prices.

As you realize, most of the oil the world uses comes from the Middle East.  U.S. imposed democracy aside, this is going to remain the most volatile area on the face of the earth for many years to come.  The probability of future disruptions in supply from the fertile crescent is a certainty.

Bottom line:  Is the recent decline in the price of oil and natural gas a blessing or a curse?  The answer is that it is both. 

It is a curse if you are banking on seeing $30.00 oil any time soon, or if you think it is going to remain at current prices very long, or you think $42.00 oil will not hamper the U.S. economy.  It is a blessing if you see this as the opportunity that it is and use weakness to invest in select energy issues.

I am quite specific in the Professional Timing newsletters as to exactly which stocks I think you should buy and at what price you should buy them.  As the year comes to an end, you can do your portfolio and your income some good by picking up a few shares of the Canadian trusts on our list. 

Our two most recent purchases pay annual dividends of 13% and 14% respectively, and they pay dividends monthly.  These gems, along with their dividends, will appreciate as a consequence of a falling dollar.  It just doesn’t get better than that.

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Oil still has center stage in the media.  What no one is talking about, however, is natural gas.  We alerted subscribers in September when natural gas was trading near $5.00 that it was about to turn strongly higher.  On October 25, gas broke over $9.00.  It’s going to be an expensive winter.

Higher natural gas prices have a major impact on our Canadian energy trusts in that they typically have about 50% of their production in gas.  Look for their earnings to improve in the next year and for their dividends to increase.

Near term, with crude oil at $55.00 and natural gas at $9.00, you may well see prices at the pump moving higher while crude and natural gas begin to move sideways and consolidate.  There is no doubt in my mind that we will see both of these considerably higher by the end of 2005.  Near term, a pause is due.

I am expecting to see some profit-taking in the energy stocks, but I am not recommending that investors sell their positions. The dividends are great, and they will be getting better.  The U.S. dollar is falling; and although we could see a bounce in the short run commensurate with a pullback in the oil stocks, the long term is extremely bullish in the oil patch. 

November will be a month to buy precious metals and energy. 

Most of the talk on the Street seems to be totally ignoring the price of oil.  The pundits seem to be acting like higher energy prices are a fleeting, short-term problem.   Well, you had better get set for a surprise.  Crude is going to sell for over $50.00 a barrel next year … and even more of a shock is that natural gas looks like it’s turning higher. 

What does this mean to you?  It means that the economy is going to have a difficult time digesting this as far as the bottom line profits are concerned.  In an effort to make up for higher energy prices, the outsourcing of jobs to China and India will accelerate. 

Interest rates are already low, so there is not much juice left to stimulate the economy with that tool.  Lower taxes are not on the horizon either.  If anything, you will be seeing increases in taxes on the state and local levels.

This scenario does not support the concept of a roaring bull market in stocks.  However, it does spell a continuation of the bull market in gold that began a few years back.  It also supports our bullish outlook on the energy. 

Our original energy stock recommendation in Enerplus has doubled, and it still pays a dividend over 10%.  We are getting considerably more return on our original purchases.

The good news is that it is not too early to participate in the bull market in gold.  We are forecasting a splendid buying opportunity in the next few months, which we are detailing to our subscribers now.  We are telling them when we expect to see the next low in gold and the mining stocks and which stocks to buy.  In fact, we just introduced an exciting new gold recommendation.

It is not too late to invest in the energy sector either.  My current recommendation is still paying over 13% dividends, and it promises to explode as natural gas prices improve.  We are very close to the day when these generous dividends will be a thing of the past.

It is true that the big dividend payers do not offer the investor growth.  Yes, they will appreciate in price.  I expect to see them double or triple over the next five years, but there are other opportunities that will perform much better.

My latest recommendation is a stock that has the potential to appreciate 10 times if crude oil stays above $30.00.  Most energy stocks like BP or Exxon sell for about $14 a barrel of reserves.  This company with $10 billion (yes, with a b) sells for about 85 cents a barrel.

Why? Simply because the industry and the media doesn’t see this company coming … YET.  This company is incredibly innovative, and it is profitable.  This is not an upstart with a dream and a promise.  It is a real company; it’s making a profit; and it’s paying a dividend.  

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It has been a summer much like we envisioned it would be.  Energy prices have been rising, and I don’t think $50.00 oil is very far off.  Perhaps we will then see a technical correction in crude. 

Nevertheless, there are not many negatives arguing for lower crude prices.  The powers that be keep trying to talk it down, but weakness has been very fleeting in the crude pit lately.

The stock market continues to struggle, and it has dipped into deep, oversold territory several times this year - most recently, this month.  One would expect some sort of technical rally, but strength has been quickly taken advantage of by the bears and rallies have been short-lived.  Bear markets tend to get oversold and stay there.

We entered a secular bear market in the early days of 2000, which was interrupted by a cyclical bull market that ran from October 2002 to January 2004.  Since then, we have seen a long period of distribution.  August was weak and September to October tends to follow suit. 

I can envision a trading rally of perhaps two weeks; but thus far, although close at times, our market timing models – Phoenix and the Nasdaq Fast Tracker - have not given us the go-ahead.  Even if they do, you have to realize what will ensue will be but a trade on the up side.  It may fail.  The overall trend in the stock market is down.

Seasonally, summer action in the market is usually dull.  However, this is not a normal year.  There is an 80% chance that John Kerry will become the next President, and I don’t think investors have given this possibility much thought … YET.  I doubt that Kerry will be bullish for the stock market.

The Fed has embarked on a new road to higher interest rates.  Interest rate levels do not necessarily disturb the markets.  The markets are disturbed by the direction of interest rates, and rising rates are bearish.

The U.S. dollar will not strengthen from higher interest rates either, as some believe.  The dollar fell from 107.50 in 1976 to 85.00 by the end of the decade, even though interest rates rose.  Interest rates zoomed over 14% during the same time frame.   Another example of the dollar crashing in the face of rising interest rates was in 1994.

Again, it is a matter of interest rate relationships that affect the strength or weakness of the dollar.  Inflation is rising now, even by official reports - which are egregiously manipulated in favor of low inflation statistics.  As long as interest rates remain lower than the rate of inflation, the dollar will weaken and inflation will expand. 

Perhaps at some point, a courageous Fed chairman will step into the fray and wield the big hammer - as Paul Volcker did in the 80’s.  Alan Greenspan is not that man. 

Over the next several years, inflation will get worse and interest rates will chase it all too cautiously on the way up.  In the meantime, the dollar will fall.  My target is to see the U.S. dollar index at 60, and that may be optimistic.

Many on the Street want to convince you that the price of crude oil should not be $38.00, but rather in the neighborhood of $28.00.  They say the difference is a “terrorist premium” due to the unsettling problems in the Middle East.  If this is true, the premium will remain until we see two or three years of stability in the Fertile Crescent.  Don’t hold your breath.

The more reasonable basis for $38.00 crude is that the world is close to the point where energy production on a global basis will peak out.  I believe this will happen by the end of this decade.  In the meantime, some of the most populated areas on the planet are booming.  China and India are both roaring economically.  That means that their energy consumption will increase in the next several years, even if there is a world recession. 

Combine this with the fact that world oil production is basically operating at capacity, you can be sure the price of oil is going to be high.  It will get higher by 2010, especially in terms of U.S. dollars.

Another reason for oil being priced at $38.00 a barrel is that the value of the U.S. dollar is falling.  This is what inflation is all about.  When the dollar falls in value, tangible assets increase in value.

Bottomline then, you should be very wary of the stock market overall.  In fact, you should be prepared for an old-fashioned crash.  This could be similar to the events in the summers of 2001 and 2002 when the S&P fell 28% and 34%, respectively.  (The Nasdaq fared much worse.)  Or it could be as bad as what unfolded in the fall 1987. 

Long bonds rallied on the Fed’s increase of short term interest rates, which does seem to be an anomaly.  It looks like a typical countertrend rally to me.  Bonds are in a bear market and interest rates are going higher, both long and short term.  Although our Hyperion trading model caught the bond rally with a nice long position in the futures, it looks like it is close to where we should expect the model to cover the long position and sell short.

Stay out of long bonds and stocks in general.  Only investments in select energy and precious metals positions should do very well in this environment.

I still feel the next significant move in the stock market will be down.  There are all sorts of technical flags popping up in my work - especially some of the weekly things I like to look at which indicate there is a high potential for the market to crash.  I am not just talking about a sell off, but a crash ala 1987.

As a sampling, the McClellan Oscillator just put in what may be the highest overbought reading ever.  Some will argue that is bullish, that bear markets do not get this overbought.  Well who knows? All I can tell you is that the market is very overbought, and you should at least take that as a warning even if you are a permabull.

We are in the time during the year (April through October) when the market generally loses money.  The Fed is going to raise interest rates.  The inflation numbers are rising. The twin deficits (foreign trade deficit and federal deficit) are both looking like they are going to increase unabated. 

Personal and corporate debt levels are at historic highs.  The recent events in Saudi Arabia could easily push crude oil prices to the $70 level.  The list goes on … but I am sure you have heard all of this before.

If you would like a bottom line, higher interest rates are bearish.  It is as simple as that.

The big question is, when will the Fed raise interest rates?  Note that this is no longer a question of “if” they will raise rates.  They will raise rates, and perhaps as soon as at their June 29-30 meeting. 

Markets anticipate, and the stock market is already beginning to tip to the down side.  We had advised readers to expect one last rally into late April, and that rally has all but run its course.  The next significant move for stocks will be down.

The rally in the dollar also looks like it’s running out of steam.  The counter-trend rally in the U.S. Dollar Index has been in celebration of the prospect of higher interest rates, but we will likely see that this was all for naught. 

The dollar’s longer term trend is down, and it will soon be resuming that direction.  The reason is that the basic reasons that the dollar has been weak are still there.  In fact, higher rates will have a dire impact on the huge debt loads being carried by all sectors of the economy and all levels of government.  Higher rates will also be too little, too late in terms of making the dollar more attractive.  

We are preparing to address the issue of higher interest rates in the next few letters.  It is time that investors factor in the effect higher interest costs will have on the economy, their personal financial situation, and their investment portfolio.   

We forecast that if the dollar index broke over 85.00, it would run quickly to 91.00.  In fact, it jumped to 90.37 on March 3rd.  However, the short covering party is now over, and the descent will unfold as the summer approaches. 

As the dollar weakens, you will see gold and silver prices rise again.  The price of crude oil and natural gas will also rise as the year wears on.  I have no doubt that we will see crude oil reach $40.00 by this time next year. 

Venezuela is seriously proposing demanding payment for oil in euros.  The U.S. debt burden continues to grow unabated.  Meanwhile, China is beginning to use all those depreciating dollars, which they have been amassing to buy and import raw materials and foodstuffs. 

Prices are going sky high already in dollar terms.  Soybeans broke over $10.00 a bushel this month, and copper is pushing $1.50 a pound.  Commodity prices are going to continue to rise as the dollar falls and the appetite for tangible assets increases.

Remember, the Chinese were trained at Wharton and Harvard.  They are not fools, which is more than you can say for their teachers.

The dollar looks positively awful.  My more bullish friends are trying to point out that the dollar is in some sort of triangle formation; and once it breaks out top side, it will move quickly to the 91.00 – 92.00 level.

Charts courtesy of www.futuresource.com
 

I see the little doobie on the chart alright; and I see how if and when it were to break over those highs at 88.50 +, one might expect a technical run to 91.00.  The problem is that we have not seen the dollar able to muster much strength.  I will believe a breakthrough top side when I see it.

In the meantime, I think you need to focus your attention - not at the top of this little respite in the dollar’s decline, but at the lows.  The March dollar is just about to break to new lows.  Once the dollar breaks 85.00, I expect the slide to 80.00 will be free and easy.

There are other signs that the little counter-trend rally in the dollar is over.  MACD has triggered a sell, my Hyperion dollar work is negative, and the RSI has turned down, etc.

So, what effect will all of this have, if any?  First of all, it will pressure interest rates on the long end.  It will boost gold and silver.  It will support higher prices for natural gas and crude oil.

OPEC has been threatening to cut production because they are losing 25% to 30% of their revenues due to the previous weakness in the dollar.  If the dollar begins to slide even more here, they are just likely to go through with their threats.

As the dollar decline becomes more serious, it will begin to take the U.S. stock market down as well.  I have been forecasting a high for this April in the averages, but I wonder if the smart money is not already moving out.  This is probably one reason the Nasdaq has lagged the rest of the market recently.

Gold has finally turned down, as we anticipated it would.  Even with prior warning, investors get cold feet when prices are falling.  I do think that because of the double top in the XAU and HUI, we will see this correction go a bit deeper than I was previously looking for.  The XAU will break below 90.

The bull market in gold is not over.  You have to keep this in mind … and keep up with the hotlines this month.  We have moved the balance of our Rydex gold program to the money market fund, and we will be announcing re-entry parameters in the coming days.

The stock market looks like it is getting tired.  Perhaps the reason is that money supply growth has slowed.  It has fallen below its 20-week moving average for the first time in several years.  It looks like the Fed is working sub-rosa in a restrictive fashion.  Eventually, this will adversely affect both the bond and stock markets.

The dollar should fall to 80.00 by next summer, and perhaps a lot lower.  The best bet is to look for gold to advance much higher by then.  I expect to see gold break through 400.00 by the New Year. 

The problem is that we are all woefully under invested in the metals.  We are advising that subscribers plan to add to their positions in our favorite gold and silver stocks during a dip that we expect to see this month.

Crude oil and natural gas are equally as important as the metals.  We are close to seeing crude oil establish a solid floor above 30.00, and natural gas is about to launch into its next major bull market leg.  I expect gas to rally to the 7.00 level by early 2004.

This will have a definite positive effect on our recommended energy stocks.  The prices of these stocks and their dividends will both rise significantly next year, and you should be accumulating positions now for that eventuality now.  Don’t wait for them to rocket to the moon before you get interested.  The time is now.

The most exciting things I see are the correction in gold and the breakouts in crude oil and natural gas.

Use weakness in the metals to buy gold and silver stocks.  We have updated our list of buy-and-hold issues and also the list of junior mining stocks we recommend.  Both lists include downside buy prices.  You can check out the lists in the most recent issue of Professional Timing Service. 

There is still time to invest in energy stocks with 14% to 16% dividends, but the recent upside breakout in crude and natural gas means time is limited to get in before these stocks move substantially higher.

Regarding the stock market in general, I am seeing serious negative divergences developing in my technical work now - just as the crowd has decided it is safe once again to mortgage the ranch and buy stocks.  The last time I saw this set of circumstances was in the summer of 1987 and the early months of 2000.

The key is not whether to buy stocks or not.  It is which stocks to buy.  The Wall Street favorites will prove to be disappointing from here, while precious metals and energy producers will serve you well.

Do approach the stock market this month with extreme caution.  Remember, everyone is a bull at the tops and bears at the bottom.

One exception to this statement is gold, silver, natural gas, and crude oil stocks.  Our previous recommendations in these sectors are doing very well for us and it is time to look at adding to these positions. 

We have just recommended a new Canadian oil and gas producer.  We expect this one to perform as well in time as Enerplus, which is now up by over 50% and paying a 15% on our original recommended price.

I have also just recommended a new gold mining issue, which one should be accumulating now.  Our previous recommendations in Anglo gold and ASA have appreciated by about 25% to 30% so far, but there is a lot more to go from here.  Gold bullion has just broken out from an extensive triangle formation and we expect to see $400/oz by years end.

The stock market is entering two of the most treacherous months of the year, August and September.  We are reporting the deterioration we are seeing in our technical models in the letters, and most of those models have now brought sell stops up closer to current prices.

The VIX or CBOE Volatility Index http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=VIX

has formed a base just over the 20 level since May.  If this was a stock, you would be very interested in buying it once it breaks out over the narrow trading range forming the base.  Typically such a situation would indicate a very strong move to the upside once the base is finished.  This looks like it would like to go to the moon.

However, when the VIX rallies the stock market falls.  If it breaks out and rallies strongly (as the extensive base would lead you to believe) the accompanying crash in the stock market will be savage.

The most important event to watch for now is a sell signal from MACD on the S&P 500.  This signal has been very close on a couple of occasions, but the market was able to recover just in time to avoid the sell.  Nevertheless, once we see this sell trigger, it will mark the end of the favorable six-month period that we wrote about in the last letter.

We will be updating this situation on our hotline reports so subscribers will not miss the signal. I am confident that the odds greatly favor the next high being the high for the market for some time.  It is conceivable that the coming high will not be exceeded until the end of this decade.  Thus, we are treading on very thin ice; and once the next break begins, the market will take the unsuspecting down with it … again.

Don’t let yourself be drawn into a bear market at the highs a second time.

I am not one to follow hunches, or so-called instinct; but with some 38 plus years involved with the markets, one does develop some intuition.  Intuition is not good enough to trade on, but it will heighten your level of awareness at times.  This is one of those times.

I am seeing a confluence of indications from the various technical models I follow.  My take on this is that we are nearing an important trading point in the next few weeks.  I call this the “tipping point” because it is not possible to forecast at this point whether the market will jump out of the trading range it has been in for the last six months or if it will dive through the bottom of that trading range. 

My hunch is that there will be a rally, but that is only a guess.  I have timing models to guide my actual investment decisions, and we need only wait and see what those models tell us to do and when to do it.

I know this is a bit soft as far as advice is concerned, but those models have had us in money market funds for some time.  It is time to be alert for some new signals and a major move out of the trading range that has plagued us for so long now.

One thing I do not have a hunch about is inflation or the future price of gold, crude oil and natural gas.  I am convinced that these commodities are going to continue to move higher.  We have made specific investments in these areas that our subscribers have already benefited from.  Our oil and gas stocks are providing handsome 12% to 16% annual dividend returns, and they pay monthly.  Our favorite gold stock also pays a decent dividend of 5%. 

Tangible assets are the future - not financials.

Recent remarks

The dollar has been able to recover from lows at 98.05 earlier this month, but it is not going to run away on the up side.   The stock market is struggling higher from a nesting of 10-week, 20-week, and 40-week lows.  Gold has corrected back to support at 330, and it’s forming a base now.  Savvy gold investors should be using weakness to accumulate positions for the next up leg in gold.

April is the last of the favorable six months for the stock market, and it looks like we will see prices firm for now.  However, sell signals in April are very important. 

We discussed the importance of MACD in this process in the March mid-month letter, and we will be delving into this deeper in the April monthly letter.   In a nutshell, we will be seeing an important high at the end of the current rally.  When our timing models issue their next sell signals, you will want to be taking very defensive action. 

What’s next?  A top in stocks and a bottom in gold.

Never lose sight of the big picture.  There seems to be a lot of that going on lately.

Investors think that just because the market has fallen 70% over the span of several years, it is a good time to buy.  Well, if you bail out of an airplane at extreme altitudes - say, 30,000 feet - and fall 70% to 9,000 feet, it is still way too early to pull the rip cord. 

Successful investing is all about profits - investing money and making a profit.  Furthermore, investment and profits must begin at the lowest basic level.

Herein lies the rub.  Corporate profits are dwindling.  The reason is excessive debt on all levels - personal, corporate, and federal.  Again, this is a root problem.  Personal debt is crushing the consumer.  He stops spending, and businesses are then unable to keep up with their debt payments.  Tax revenues fall, and the government goes deeper into hock.

It is a nasty spiral, but the debt load needs to be adjusted.  There will not be an economic recovery until that is accomplished.

Already we are seeing the effects of this process on the dollar.  The Federal Reserve has officially announced that they are going to print money overtime to combat the threat of deflation.  They are good to their word, and the dollar is falling.

We were on top of the dollar problem early with investments in precious metals and other select tangibles, like crude oil and natural gas.  Our recommended energy positions are paying off very well, as are our investments in gold.  Crude and natural gas are moving higher each week, but gold has corrected.

We are now nearing a point where we expect the correction in gold to end and the next up leg to begin.  We are making new recommendations to our subscribers.  One new recommendation we wrote up in the March monthly letter is a very interesting gold play that sells for under $5.00.

When our models signal the go-ahead, we will also be telling subscribers to move back into trading positions in our Rydex gold trading program.  We are not there yet, but the time is drawing near.

I am not very happy that gold is correcting here, but it should recover soon.  Stocks may have a brief bounce, but I don't look for much on the up side.  The next decent tradable low for the stock market will likely come during mid-March.

Now we are in the time frame when a traditional Santa Claus rally should be developing; but so far, weakness has prevailed.

It is a bear market, and it isn't over yet.  We feel that typical contra bear investments will do well in 2003 - in particular, gold.

So far, the rally has been labored and difficult.  We do have to remember we are experiencing a rally in a bear market.  By October 2003, you will see prices much lower than they are today.  That makes the next sell signals very important.

Those sells could come at any time now.

The next step will be a wonderful buying opportunity, which we expect will form in the weeks ahead.  We could see lows by mid-October, but our timing models will give us the green light when it is time to move back in.

Subscribers, stay in touch for some important buy signals coming up.