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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