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InterMarket Review / Volume 29, No. 12 1

InterMarket ReviewMartin Pring’s

Commodities: CRB Spot RM – Monthly close below 521.1 for a negative 12-month MA crossover or above 530.5 for a positive 65-week EMA crossover.

Currencies: Dollar Index - Month-end close below 80.6 for a negative 12-month MA crossover; below 81.2 for a negative 65-week EMA cross.

Credit Markets: Bonds - Friday close for Barclays 20-year Trust above $123.4 for a positive 65-week EMA cross; above $13.4 for a positive 12-month MA cross.

Global Equities: MSCI World ETF - Below $47.2 for a negative 12-month MA crossover and below $47.5 for a negative 65-week EMA cross.

Precious Metals: Gold:- A Friday close above $157.4 for a positive 65-week EMA crossover for the GLD; a month-end close above $159.6 for a positive 12-month MA crossover.

US Equities: S&P Composite - Month-end close below 1443 a negative 12-month MA crossover; a Friday close below 1431 for a negative 65-week EMA crossover.

Publishing a synopsis of the world’s Intermarket Analysis for over 25 years.

1. US equities are vulnerable to a correction but the long-term indicators remain positive.

2. Gold and silver complete important tops.

3. The sell-off for commodities is probably over as Stage IV moves ahead.

4. Our Growth Indicator continues to indicate that the natural level of short-term interest rates is higher than current levels. The Fed, of course, has different ideas.

5. Gold/Bond ratio completes a major top favoring bonds.

Markets approaching important benchmarks.(These are not predictions, merely important chart points.)

Market Summary Markets Requiring Action

4830 Sweetmeadow Circle, Sarasota, FL 34238941-926-9664

Chart of the Month ..............................................................2Guidelines for IMR Asset Allocations .................................3U.S. Dollar-Based Asset Allocation.....................................4Overview and Global Financial Markets .............................6U.S. Stock Market.............................................................12Martin’s Stock Picks .........................................................18U.S. Credit Markets ..........................................................24Commodity Markets..........................................................28International Markets ........................................................33Currencies ........................................................................38Precious Metals ................................................................41

Contents

May, 2013 VOL. 29, NO. 12

Data Sources and Reuters Symbols

Amex Brokers Index .XBDCRB Spot Raw Material Index - Gold Bugs Index .HUIJOC-ECRI IP Index (Barron’s Market Lab).Goldman Sachs Indust Metal Index .GYXGoldman Sachs Energy Index .GJXGoldman Sachs precious Metal Index .GPXEurotop Index .AEURPhiladelphia Gold and Silver Share Index .XAUDow Jones World Stock Index .WIDOW

~ IMR Data Links ~You can now access links for data (economic and mar-

ket) referenced in the InterMarket Review. They can be accessed for free at www.pring.com/imrlinks.htm.

Please note our web site (pring.com) now allows you to plot the daily KST and smoothed RSI or the short, intermediate and long-term KST’s, as well as the Special K for all stocks and a variety of key indexes. By Googling other sites such as “Yahoo Finance India” “Yahoo Finance Canada”, etc. Non US subscribers can also chart local stocks.

2 InterMarket Review / May, 2013

Chart 1

This chart lays out two scenarios for the CRB Spot Raw Industrials. We use this series because only one of its components are weather driven. Also, the remaining ones are traded between in-dustrial providers and users and are therefore less prone to distortion emanating from speculative forces. These characteristics also make it a useful economic indicator in its own right.

The chart shows that the Index has reached a crucial juncture point because it offers two pos-sible outcomes. The fi rst, in the upper window, is supported by the vast majority of our long-term technical and economic indicators. It calls for a break above the green (potential) inverse head and shoulders neckline and thereby higher prices. The second, lower probability outcome, would involve the violation of the red (potential) head and shoulders neckline in the lower window. The two (Friday close) benchmarks to monitor are 545 and 500.

CHART OF THE MONTH: Two Commodity Scenarios


Recommended U.S. Sector ETF’sClaymore Timber (CUT)**$18.50Dow Jones Brokers (IAI)**$25.50Dow Jones Home Construction (ITB)**$21.80Dow Jones Insurance (IAK)**$32Dow Jones Oil & Gas (IEO)**$63First Water Trust (FIW) **$24.50GlobalX Platinum (PLTM)**$12.50Goldman Sachs Natural Resources (IGE)***$42.25Guggenheim Shipping (SEA)**$15.50PowerShares Building and Construction (PKB)**16PowerShares Nanotech (PXN )****6.75Russell 2000 (IWM)**87Rydex Equal Weight Energy (RYE)**62.25Rydex Equal Weight Industrials (RGI)**$56.50Rydex Equal Weight Materials (RTM)**$60S&P Global Financial (IXG)**$47.50Spider Homebuilders (XHB)**$27.80Spider Semiconductor(XSD)****51.25

Asset Allocation Recommendations

* Dependent on market action. ** Stop is based on Friday close. **** Buy on Friday close above.

The portfolio allocations presented above for the Inter-market Review (IMR) have two functions. First, they are intended as a guide for a neutral investor; i.e., one who lies between conservative and aggressive. For example, we may recommend a 40% allocation to US stocks. An older more conservative subscriber looking for income and safety may conclude that such an allotment may be too aggressive. On the other hand, a younger investor, who has time and cash fl ow on their side, could fi nd the 40% overly conservative. The basic point is that these allocations should only be taken at face value if you consider yourself to be a neutral investor.

The second purpose of our allocations is to summarize our thinking about the markets in a practical, executable way. For example, we might conclude from the position of our indicators that infl ation hedge stocks and commodities are headed higher. In that instance, the allocation page would be used to emphasize those views by recommending infl ation driven sectors, resource based country ETF’s, such as Canada and Australia, as well as commodity index ETFs or individual commodity ETF’s. We might even include an inverse bond ETF to undermine our infl ationary expecta-tions. By the same token, if our indicators suggest a global bear market for equities, that portion of the portfolio would be greatly reduced. This equity exposure would most likely comprise defensive sectors such as utilities and consumer staples. Greater exposure to long-term bonds and cash would round out the picture.

Guidelines for IMR Asset Allocations

Various asset classes and sectors perform differently in different parts of the business cycle. Our recommendations are usually consistent with the prevailing stage as fl agged by our models. Technical factors that we take into consideration are long-term moving averages, such as the 12- month or 65-week time span, the absolute long-term KST, relative action and the long-term KST for relative action. Individual US equity sectors are compared to the S&P Composite and country ETF’s to the MSCI World Stock ETF (ACWI).

Since there is always a bull market somewhere and some investors have an insatiable appetite to be constantly active, we do, from time-to-time, recommend spreads where it’s possible to take advantage of a trend in a relationship that can benefi t regardless of the market’s direction. For example, transports tend to be an early cycle leader and energy a laggard. If the technicals were consistent, a long transports/short energy ETF trade might be appropriate.

In most instances, risk management stop losses are rec-ommended. The stop will typically be placed below a previous short-term low or more commonly under a 65-week EMA. Each month the stop levels are reviewed and where possible are raised. When a market or sector is considered vulner-able, stops will be tightened aggressively. Because markets can move strongly between issues, new subscribers should always assess the risk between current prices and stop levels to make sure that the difference is manageable. If it is not, it probably means the security in question is overstretched and you are better advised to wait for a correction.

US Stocks25%

Cash30%

International Stocks

30%

Oil5%

Currencies

10%


U.S. Dollar-Based Asset Allocation

Our Barometers remained in Stage IV in April. That leaves Bonds at 0%, Stocks at 100% and Commodities at 75%. Stage IV is an infl ationary one, but price action in the fi nancial markets certainly did not refl ect this in the last few weeks; with a sell-off in most commodity sectors and a rise in government bond prices. As a result, the technical position of infl ation versus defl ation sen-sitive assets has now reached a critical stage, in that any additional infl ationary weakness would, from a primary trend point of view, tip the balance of evidence to the defl ationary side. Nevertheless, we are still of the opinion that the cycle is about to tilt in a more infl ationary way. First, while it is possible for the cycle to regress to a defl ation-ary stage, as happened in 2011, evidence from the leading economic indicators is pointing to progression rather than regression as they did in 2011. In this respect, we are specifi cally thinking about momentum for the ECRI Weekly Leading Indicator (Chart 24) and the ratio between ISM new orders and inventory (Chart 12). Housing start momentum, another forward looking series, is also still pointing north. Even the OECD LEI, an aggregate global measure, has started to pick up (Chart 3), albeit somewhat anemically. Add to that, the fact that recent commodity declines have pulled many sentiment levels for infl ation sensitive assets back extreme readings; and that many short-term momentum indicators are deeply oversold, the time is probably ripe for a commodity rally to develop.

If so, it will make sense to be on the lookout for changes in equity market sector leadership away from defensive and fi nancially related is-sues towards resource and basic industry oriented ones.

AllocationsThe US equity allocation remains at 25%

and the international continues at 30%. Specifi c country recommendations for the international allocation are: Turkey (TUR) ($56), Mexico (EWW) ($63), Australia (EWA) ($24), the Netherlands (EWN) ($19.50) Hong Kong (EWH) ($18.10), Austria (EWO) ($16), China (FXI) (36.25), Swe-den (EWD) ($28.50) and Japan (EWJ) ($9.8). The dollar fi gures in brackets indicate Friday close stop loss points. Indonesia (IDX) is being added with a stop at $29.50.

Last month we were stopped out of a 5% allocation to copper (JJC), platinum (PPLT) and palladium (PALL). We continue to believe that the infl ationary part of the current business cycle lies ahead and are therefore recommending a 2.5% allocation back into the platinum ETF on a daily close break above $151 and a further 2.5% on a Friday close above $171. Re-entry levels for the PALL would be $70.50 and $77 for 2-1/2% each. We would also recommend a 5% allocation to the Dow Jones UBS Commodity ETN, with a daily close above $41.50and a 5% allocation to the iPath Grains ETN (IIG) in the event that it experiences a Friday close above $52.

The basic trend for the US Dollar Index con-tinues to be favorable, but some worrying signs have started to develop. Our previous currency allocation of 10% continues to be made to the Dollar Index ETF, the UUP ($22) and the short euro ($18.50). Note that the daily close stop, in brackets for the EUO has been raised this month.

May 3, 2013

Martin J. Pring


Stage lV fi gures are monthly returns on an annualized basis. They represent averages of Stage • IV performance for the 32 Stage IV signals since the mid-1950’s. Individual Stage IV perfor-mance may vary considerably from the average. Generally Stage IV favors earnings driven sectors and provides a poor background for owning defensive issues and fi xed income.

This performance data only measures sectors/industry groups where a multi-decade price • history exists. Thus, it does not include internet stocks etc.

STAGE 4 – SECTOR WINNERS

Stage IV Summary 1955-2011

- Signals 32 - Average Duration 6.5-months - % of total period 32%


World Overview &Global Financial Markets

Chart 2

World Bond Index (BWX*3+AGG Spliced) and a Long-term KST

The balance of long-term technical forces still tilt in an infl ationary direction, but April price ac-tion has certainly thrown up some doubts on this interpretation. We see the infl ationary/defl ation-ary battle as having reached a crucial juncture point. Consequently, price action in May and June may well prove to be critical in this regard. What we can say is that long-term momentum for global bonds (Chart 2) remains negative fol-lowing a recent secular up trendline violation. By the same token the KST for our Global Com-modity Index (Chart 3) has started to reverse to the upside but not quite gone bullish. The series in the bottom panel is a derivative momentum

series calculated from OECD leading indicator data. The arrows show that it consistently leads the commodity KST and remains in a rising mode. There is no example in the chart of weakness in the commodity KST not being preceded by a peak in the economic series. This relationship indicates that as long as global economic velocity continues to advance, commodity price should stabilize or rally.

Chart 4, refl ects global infl ationary/defl ation-ary forces as it pits commodities against bonds. Here we see a mixed picture as the KST is rally-ing but the ratio itself is back below its 12-month MA, but certainly in its recent trading range. A


Chart 3

Global Commodity Index and Two Indicators

Chart 4

Global Commodity/Bond Ratio and a Long-term KST


Chart 5

Global Commodity/Bond Ratio and Two KSTs

rally above its March high would obviously be quite infl ationary since it would complete a re-verse head and shoulders pattern and reinforce the rising KST. That possibility is also shown in Chart 5. However, that same chart also shows an alternative scenario whereby the ratio com-pletes a head and shoulders top with a break below the red solid trendline. Note also that the short- and intermediate KSTs have started to go bearish (defl ationary). You can perhaps now better understand why we say the situation is likely to be resolved in May or June since these series will to extend their decline or reverse to the upside within that time frame.

One series worth monitoring is the Baltic Freight Index as it remains within a tighten-ing trading range. Here again, narrowing and confl icting KST action muddies the forecasting waters but the moment of truth looks as though it is rapidly approaching. Please do not get the idea that there is a super strong correlation between the Index and the economy because that is not the case. Freight rates are also determined by capacity and that’s defi nitely in a current state

of excess. However, there is a broad enough re-lationship that suggest that if the Index breaks decisively above the down trendline, say to 1000, it would certainly offer a possible sign that global economic activity might be picking up.

Chart 7 compares the MSCI World Stock ETF to a series that has been defl ated by the OECD CPI. It recently violated its 2007/13 down trendline and is above its 12-month MA. Since the KST for real global equity prices is positive, the long-term trend remains favorable. Having said that, the breakout has so far proven to be an anemic one and the KST is not in a strongly bullish mode. Consequently, the trend is defi nitely positive, but by the same token, it would not take much in the form of weakness to reverse it to a downward one.


Chart 6

Chart 7

Nominal vs. Defl ated World Equities

Baltic Dry and Three KSTs


iShares MSCI World Stock EFT (ACWI) and a Net New Local Highs (104/1) Indicator

Chart 8

Chart 8 shows the very fi ne state of the current technical balance. This is because the indicator in the lower panel, constructed from a basket of individual country ETF/s registering 2-year (104-week) net new highs, remains within its 2011/13 trading range. The last three instances when trading ranges developed and subsequently broke to the downside were all followed by bear markets of some kind.


Chart 9

iShares MSCI World Stock EFT (ACWI) and Two KSTs

We think the odds favor a downside break because the short-term KST in Chart 9 is in a bearish mode and is likely to push its delicately balanced intermediate counterpart into a more decisive bear trend. We like to say that trend trumps everything. While weakening momentum can, and often does, warn of trouble, it’s always important to make sure that the price is respond-ing to such negative characteristics. In this case, we would look for a downside violation of the 2009/13 up trendline and that would come with a decisive move below $47. The line is actually at $48, but the down trendline and 65-week EMA are at $47. Were they to give way, we believe a decline of some kind would unfold.


U.S. Stock Market

S&P Composite and the New Stock Barometer

Chart 10

The primary trend for equities remains posi-tive and the consensus of our long-term indicators remain in a bullish mode. However, the intermedi-ate technical structure is overstretched and likely to trigger some kind of a decline. The nature of any correction will be important, for if it should get out of hand, many of the currently positive primary trend indicators could easily be pushed into a bearish mode. On the other hand, a con-tained correction would enable these indicators to remain bullish, thereby setting the scene for additional upside potential.

Long-term indicators in the bullish camp include our Stock Barometer, which remains at a 100% reading. Also, the number of industry

groups with positive momentum in the center panel of Chart 11 is in a rising trend. The solid arrows show that such action is usually followed by higher prices, so as long as this indicator can continue to rally, it will be a positive factor. Note that the KST is also in a gently rising trend; not strong enough to be overly confi dent but positive nonetheless.

Finally, almost every bull market peak since 1900 has been preceded by a trend in rising short-term interest rates. Clearly, that is presently not the case and that also should be regarded as a bullish factor. Rising rates, of course, adversely affect the economy with a lag and here again most of the long-leading economic indicators are


Chart 11

S&P Composite and a KST of ISM New Orders/Inventory

Chart 12

S&P Composite and Two Indicators



Chart 13

pointing north. Housing starts, which usually have the longest lead of all, are still rising. So, too, is the KST of the ECRI Weekly Leading Economic Indicator in the bottom window of Chart 24. Even the KST of the ratio between new orders and in-ventory, as reported by the ISM, has started to turn up; a development which Chart 12 shows, is usually more consistent with an economy coming out of a recession than one about to fall into it.

Having said that, it is also apparent that eq-uities are running into some serious resistance. Chart 11 tells us that the absolute price is right at its 2000/13 up trendline and Chart 13, that the infl ation adjusted S&P is just marginally above its secular down trendline. Equally important is the position of the S&P when defl ated by M2. Trendline violations and positive 96-month MA crossovers have historically represented valid sig-nals of secular bear reversals. The center window of the chart shows that this ratio is just below both benchmarks. Were it to rally decisively through the line, it would represent an important piece of evidence that the secular bear might have ended in 2009. The modest reading in the 24-month

ROC would certainly support higher prices before becoming overbought. However, in the event that the ratio turns down from here, it could be argued that its recent recovery high was accompanied by virtually no upside momentum; a characteristic that often precursors an above average decline, as fl agged by the arrows. Such a scenario would be signaled by a break in the 2009/13 (red) up trendline (see Chart 13) below the previous low at .1327. The ratio is calculated by dividing the monthly S&P close by the last Friday of the month seasonally adjusted M2 number (Source Barron’s Market Lab or St. Louis Fed).

Intermediate TrendThe intermediate health indicator in the bot-

tom panel of Chart 14 measures the percentage of a basket of Dow stocks with positive momentum. It almost always leads the intermediate KST for the S&P Composite. A couple of weeks ago, it be-gan to roll over and now looks as if it has topped out. That probably means that the intermediate KST itself will soon go bearish; a sign of potential vulnerability in the S&P itself.


Chart 14


S&P Composite and the “Food” Model

Chart 15


S&P Composite and Three Indicators

Chart 16

When food stocks out-perform the S&P, this usually indicates caution among investors and prices typically fall. This relationship is shown in momentum format in Chart 15, where a declining KST is bearish and vice versa. It seems that reli-able signals of positive and negative intermediate trends are signaled when the indicator crosses above and below zero, respectively. As you can see, the model has been bullish since early 2012 and remains that way. However, the indicator has started to roll over again from a pretty low level. A negative crossover is therefore likely.

Chart 16 also shows a slippage in confi dence, this time emanating from the bond market. In this instance, the ratio between government and Moody’s BAA Corporate bonds. A rising ratio indicates that investors are growing more con-fi dent as yields on BAA bonds are falling faster

or rising less quickly than governments. This series recently experienced an upside breakout earlier this year, but that proved to be a whipsaw move. Now the ratio has fallen below its 2012/13 up trendline and both KSTs have gone negative. Given the connection between this confi dence ratio and the S&P, lower prices are likely over the intermediate term.

Large Cap/Small CapThe ratio between large and small cap stocks

is confi ned below its 2009/13. However, it looks as though it might soon violate the trendline in the immediate future as the short- and intermedi-ate KSTs are in a positive mode and the ratio is right at the line. Not everything is perfect though, because the long-term series is still below its EMA.


Chart 17

Large Cap vs. Small Cap Ratio and Three KSTs


Martin’s Potential Buy Candidates

Each month we introduce several technically attractive looking stocks. The basis for the selection is that the long-term KSTs are usually below, or close to, zero and above the their EMA’s. Some times the stock will have broken out and is an immediate buy, while oth-ers will need to be stalked for a short-term correction. Finally, some may appear to be forming bases, but have not broken out. These situations will usually have a short-term KST buy, just requiring the price to confi rm. Such stocks are recommended in anticipation of a breakout.

Conservative investors may wish to wait for the long-term chart entry point to be achieved,

Chart a-2

China Automotive Systems Inc. and Two Indicators - Symbol: CAAS

China Automotive Systems Inc. and Three Indicators - CAAS

Chart a-1


Chart b-2

Diamond Offshore Drilling Inc. and Two Indicators - Symbol: DO

Chart b-1

Diamond Offshore Drilling Inc. and Three Indicators - Symbol: DO


Chart c-1

Halliburton Co. and Three Indicators - Symbol: HAL

Chart c-2

Halliburton Co. and Two Indicators - Symbol: HAL


Chart d-2

International Shipholding Corp and Two Indicators - Symbol: ISH

Chart d-1

International Shipholding Corp. and Three Indicators - Symbol: ISH


Chart e-1

Transocean Ord Shs and Three Indicators - Symbol: RIG

Chart e-2

Transocean Ord Shs and Two Indicators - Symbol: RIG


Chart f-2

Valero Energy Corp. and Two Indicators - Symbol: VLO

Chart f-1

Valero Energy Corp. and Three Indicators - Symbol: VLO


Chart 18

U.S. Credit Markets

The bond market may have rallied in April but our Bond Barometer remains in the base-ment with a zero reading, thereby hinting that recent strength will turn out to be temporary. Chart 19 shows that our growth indicator con-tinues to rally. As you can see from the colored highlights, a rising growth series usually means that short-term rates are advancing. Also point-ing to higher rates is the ratio between loans and government securities as held at commer-cial banks. The momentum of this relationship turned up some time ago (Chart 20), but now the actual ratio has experienced a very marginal crossover of its 12-month MA. The arrows show that if this becomes a more decisive crossover, the natural consequence would be rising rates. That’s because banks would have reached the

iShares Lehman 20-year Trust (TLT) vs. the Bond Barometer

point in the cycle where their balance sheets would favor loan growth (demand for credit) over government securities (supply). Thus, both Charts 18 and 19 are starting to indicate that the natural level for short-term interest rates is higher. Consequently, should the Fed unduly temporize, infl ationary pressures would start to be unleashed. Two things to bear in mind; fi rst this process takes time to develop, so these pressures would likely build slowly; second, history tells us that central banks are always behind the curve, especially when it comes to tightening. As a result, central bankers, just like politicians, should be regarded as a lagging indicator.


Chart 20

Commercial Paper Yield and Two Indicators

Chart 19

Commercial Paper Yield (3-month) and the Growth Indicator


Chart 21

20-year Government Yield and a Long-term KST

Chart 21 features the 20-year government yield plotted inversely to correspond with price movements. This series is currently experienc-ing a bearish and overbought long-term KST, so there is a high probability that the potential head and shoulders pattern, indicated on the chart, will be completed. At the moment though, Chart 22 shows that the short- and intermediate KSTs are in a rising mode, so further near-term advances cannot be ruled out. If our bear mar-ket assumption proves to be correct, it’s quite likely that any advance will be quite limited. The intermediate KST trading action in the ellipse shows that counter-cyclical rallies cannot be relied upon in the same way that pro (primary) trend ones can.


Chart 22

Government 20-year Yield and (Inverted) and Two KSTs


Commodity Markets

Chart 23

CRB Spot Raw Industrials and The New Commodity Barometer

Commodities underwent some strong selling in April but our Infl ation Barometer remains at a bullish 75% and is within a whisker of moving higher because the KST for the CRB Spot Raw In-dustrials is fractionally below its moving average. As you can see from Chart 24, the ECRI Weekly Leading Economic Indicator has a consistent habit of leading the KST, and this series is still advancing. Other indicators, such as the diffusion series monitoring a basket of commodities above their 24-month MA’s (Chart 25) and the KST for the bond market confi dence ratio (Chart 26) are also positive.


Chart 24

CRB Spot Raw Industrials and Two Indicators

Chart 25

CRB Spot Raw Industrials and a Commodity Diffusion (24/9) Indicator


Chart 27

CRB Spot Raw Materials Index and a Lumber KST

Chart 26

CRB Spot Raw Industrials vs. a Long-term KST (CRB/Gold) Indicator


Chart 28

CRB Composite and Three Indicators

Lumber, a leading commodity due to the fact that it is tied to housing starts, is also doing well. Its KST leads that of the CRB Spot, as demon-strated by the arrows in Chart 27. This series bottomed out some time ago and is showing no signs of reversal at this juncture.

Chart 28 compares four leading commod-ity indexes. Two of them, the non-agriculturally based CRB Spot and ECRI JOC series have broken out from small bases. However, the Dow Jones UBS and CRB Composite remain below their bear market trendlines and require Friday closes of 138 and 306 in order to break or about a 6-7% gain from current levels.

Chart 1 lays out two scenarios for the CRB Spot Raw Industrials, our preferred commodity index. The fi rst, in the upper window, is sup-ported by the vast majority of our long-term indicators and calls for a break above the green (potential) inverse head and shoulders neckline. The second, lower probability outcome would involve the violation of the red (potential) head and shoulders neckline in the lower window. The two KSTs (Chart 29) are currently in a negative

mode, which at best indicates the need for more consolidation. If this is a bull market, which is our belief, the negative implication from the two KSTs will be limited in scope, which in this case would enable the price to hold above the lower red. However, there are certainly no guarantees on this one; all the more reason to remain fully vigilant and fl exible.

OilThe oil price is in a very fi ne state of technical

balance. First, the price action has recently been contained by two converging trendlines. Second, the 65-week EMA, normally a reliable indicator, has been experiencing numerous whipsaws re-cently. All three KSTs are currently bearish, but each has started to hesitate and that suggests a resolution to this trading range problem is prob-ably not far away.


Chart 29

CRB Spot Raw Materials Index and Two KSTs

Chart 30

Light Crude Continuous and Three KSTs


Chart 31

Commodity/Bond (CRB Spot/TLT) and a Long-term KST

Infl ation/Defl ation WatchChart 31 shows the ultimate infl ation/defl ation

relationship, the ratio between the CRB Spot and Bonds together with its KST. The arrows show that historically when this indicator has reversed to the upside, such action has usually developed at the beginning of an infl ationary rally. Consequently, the latest reversal is bullish sign for infl ation. It’s also important to bear in mind that this series does not have a perfect record as evidenced by action contained within the ellipses.

Weekly data, substituting the Dow Jones UBS Commodity ETN (DJP) for the CRB Spot (Chart 32), shows the possibility of a reverse head and shoulder being formed. The breakout point would require a decisive Friday close above .366. (The ratio is calculated by dividing the DJP by the TLT.) The long-term KST for this series is completely

fl at and could easily move in either direction. Since the other two KSTs are still declining, price action over the next few weeks will be crucial for the infl ation/defl ation outlook. If the implied correction from near-term momentum is not contained the current cycle would retrograde to a defl ationary phase.

Finally, Chart 33 shows that our ratio of in-fl ation to defl ation sensitive stocks has reached major support at a time when the short-term KST is oversold. The green arrows show that historically, when this highly cyclical KST has fi rst entered the oversold zone, this condition has usually been followed by a rally. Since the ratio itself has also reached support we are expecting a bounce from current levels.


Chart 32

Dow Jones UBS Commodity/Barclays 20-year Trust (DJP/TLT) and Three KSTs

Chart 33

Infl ation/Defl ation Ratio and Two Indicators


International Markets

Chart 34

S&P (SPY) RS EAFE (EFA) and Three KSTs

US vs. The Rest of the WorldIt looks as though the counter-cyclical rally

favoring US equities (SPY) against the rest or the world is over (EFA).That view is based on the fact that the short-term KST has now joined its long-term counterpart in the bearish camp. The key will be to see if the neckline of the indicated potential head and shoulders top is taken out with a Friday close below 2.5.


Chart 35

MSCI Asia Ex Japan (EPP) and Three Indicators

Chart 36

S&P Europe 350 (IEV) and Three Indicators


Chart 37

iShares MSCI Emerging Markets (EEM) and Three Indicators

Asia Ex JapanThe Asia Ex Japan ETF is trying to push

through resistance. Since the long-term KST is positive, there is a good chance that will happen. The same can be said for the relative action. Consequently, a move above the two trendlines would suggest that equity markets in this region would not only advance, but move up at a faster pace than the rest of the world.

EuropeThe European IEV is also below resistance on

both an absolute and relative basis. The relative line has yet to move above its 65-week EMA and is the weaker of the two. However, with both KSTs in a rising mode, upside breakouts are likely to develop, especially as they each hooked up last week.

Emerging MarketsThe Emerging Market ETF, the EEM, continues

to look weak on a relative basis, which means that this area should, in general, be avoided. Even the KST for absolute action in the second window appears to be struggling.


Chart 38

US Dollar Index and a Long-term KST

Dollar IndexThe intermediate and long-term KSTs for the

Dollar Index are both pointing north, suggesting that the short-term sell condition that is currently underway will be contained. This rosy scenario would be severely questioned in the event that the strong support evidence by the two red trend-lines at 79 is breeched.

EuroThe euro is caught between resistance at 135

and support at 128. The momentum indicators are offering a mixed picture with a bullish short-

Currencies

term, bearish intermediate and fl at long-term series. That fl atness indicates a fi ne balance be-tween buyers and sellers, which is why a break above 135 or the completion of the potential head and shoulders top will provide the best clue of the future direction of the currency.

YenThe yen is now deeply oversold and in a con-

fi rmed primary bear market. However, few trends develop as straight lines, which means that the oversold and reversing nature of the short-term KST should generate some kind of a corrective move in the period ahead.


Japanese Yen and Three KSTs

Chart 39

Chart 40

Euro and Three KSTs


Chart 41

Australian Dollar and a Special K

AustraliaThe Aussie dollar remains in the $101-$104

trading range bounded by the two converging trendlines. The direction of the breakout is likely to determine the nature of the next important move. The Special K is hinting that will be down since it has completed a head and shoulders top and just registered a new low for the move. Usually where the Special K goes the price soon follows.


Chart 42

Canadian Dollar and a Three KSTs

CanadaThe Canadian dollar is also caught in a trading

range between 97c and $1.02. In this case, the rising short-term KST is holding out the possibility of a rally but the bearish long-term series says it is unlikely to amount to much.


Precious Metals

Chart 43

Spot Gold and a Long-term KST

GoldLast month saw a sharp setback for the gold

price as key support was violated and an im-portant top completed. This action confi rmed that gold has been in a primary bear market for a couple of years, but the big question is whether the secular bull market is intact. That’s an important distinction because secular trends dominate the characteristics of primary trends that fall below them. During secular bull markets cyclical (primary) trend bears tend to be brief and relatively well contained, but in a bearish secular environment primary trend bear markets are much more severe.

The implication for the current situation is that if the secular bull market is alive and well and there is a good chance that the 2011/1? bear market might be over. If it has reversed to a bear-ish one, April’s bottom would more likely serve as a temporary one, which would subsequently be followed by new lows. Chart 43 attempts to shed light on the direction of the secular trend, but unfortunately the analysis is far from irrefutable. This is because of the lack of data points from pre-vious reversals. Whereas historical equity, bond and commodity data is extensive that for gold is not since it only goes back to 1968. Bearing that in mind, the oscillator in the bottom panel is constructed by dividing a 30-month by a 240-


Chart 44

Gold and a Long-term KST

month MA. It seems to refl ect the secular bear market and subsequent bullish one quite well, using the MA crossover as a signal that was later confi rmed as the price violated the trendline and crossed above the 96-month MA. The oscillator recently stalled but remains well above its MA, so based on this sample of one signal, momentum remains positive. The price also remains above its 96-month MA but has completed a top and vio-lated its secular up trendline. Since the direction of the secular trend is in some doubt, our view is to consider the primary trend and assume that the bear market is intact until proven otherwise. In that context, we would look for a reversal in the KST and a move above the 12-month MA, which at the end of April was at $1640.

Obviously, from a contrarian aspect the price should be able to maintain itself above the April low for a while as sentiment is negative and mo-mentum oversold. However, we believe that it is a wiser to wait for the dust to clear before taking a more aggressively bullish stance.


Chart 45

Platinum ETN (PPLT) Spliced and a Long-term KST

Chart 46

Platinum ETN (PPLT) Spliced and Three KSTs


Chart 47

Palladium ETN (Spliced) (PALL) and Three KSTs

Platinum and PalladiumPlatinum looks to be in stronger technical

shape than gold as its long-term KST is in a bullish mode. Chart 46 shows its recent trading range in closer detail and we can see that the short-term KST has started to turn up. It’s true that the in-termediate series is negative, but as long as the price can hold above the lower end of the base at $138, the odds of a new bull market high will continue to remain above 50/50%.

The long-term KST for the palladium price is very close to a buy signal, which would defi nitely occur in the event that the price is able to rally above the trendline at $825. If such a develop-ment is going to take place, it will likely be later rather than sooner because the short- and inter-mediate KSTs are slightly negative.

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