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SUMMARYANDCONCLUSION:The Stock market closed lowerfor eight consecutive weeks,to a 13-year low, into thefull moon lunar syzygy of March loth. Then it began to rise.Today, in dramatic contrast, Stocks have closed higher for nine consecutive weeks, scoringthe sharpest gain in seventy-six years, into the full moon lunar syzygy of May 8th

•

According to these indicants alone, the market has come full circle, and should be readyto decline. However, our other indicators are sufficiently robust to keep our Intermediateand Long Term equity models on their respective BUYsignals of March 19th and March 2'rh•In the past, Intermediate Term signals typically lasted afew months, and the average LongTerm signal lasted afew quarters. Given today's anomalous market dynamics, our modelsare likely to be less than normally stable; but position accounts have no obvious remedybut to follow the models. When these signals were originally given, we bought smallerthan normal positions and/or we bought equity-substitutes such as Junk Bonds andConvertibles. The wisdom of this strategy is now being called into question, but we are notsure what, if anything, to do about it. Normally a 5-wave, 17-month 7700-point bearmarket such as we just had, might be expected to lead to a 3-wave, 3-month, 2900-pointrally. So we should have higher to go in terms of price. In terms of time, there are twoCycleDates and a Bradley Date in July, so the Stock market may be able to hold togetherinto early summer. In terms of the wave count, we have no definitive opinion. We are stillflat T-Bonds and long equity-like Bonds. We are also long Gold, Commodities and Forex.

Stocks: We consider Lowry's one ofthe best tools for negotiating the Stockmarket. However, we use it not as astand-alone model, but as part of anarray. On a subjective basis we graded

the data Positive in mid March.However, the experts at Lowry's havedeveloped objective protocols forgenerating signals, and according tothem, the data gave a Buy last Monday.

•••••••.\11,----- -------....•. •• ih.1II

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---------~

~ ~ 96OJ INDUSTRIALS ,~~fl~~~J~~;L ~2DD-Day Moving Avera e

\fhlii\ ~.Jti--- ---- -~~~""jI '1

'n'rp, '\u/ •..-It'Q'ipI''' 80

'IF 67

rr .,.,/'~

.-.. I----- - ----- ----~--......- --.-'"1----~

,;-- ---NYSE SELLING PRESSURE INDEX

NYSE BUYING POWER INDEX

.•..•...••.. --..... ~ ~--=-v~ --~_':.

Y -.....- .;,;:- ----- ----- --...,. '''- .:;rr- --t.•..•... ~MAY JUNOa JULOa AUGOa SEPoa OCT08 Novoa DEcoa JAN09 FEB09 MAR09 APR09 I MAY?

c'000 :oJ~

- 00-oU.c~roQlenQl0::~~-l

0>ooN.•....cOl'C>.0-o

"U

Source: Commodity System, Inc. (CSI)w c id

MJSDMJSDMJSDMJSDMJSDMJSDMJSDMJSDMJSDMJSDMJSDMJSDMJSDMJSDMJSDMJSDMJSDMJSDMJSDMJSDM1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

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Barclays Capital Long-TermTreasury Bond Price Index

5/07/2009 = 1830.11(Scale Right)

121114108102

969085807672

FINEX Trade Weighted U.S. Dollar Index5/07/2009 = 83.83

Scale Left

71.36

1009.80

Comex Gold13-Week Perpetual Contract

5/07/2009 = 917.30Scale Right

21662088201319401870180217371674161415561499144513931343129412471202

952844747662587520461408362320284252

Global Equities: On a relative basis,Emerging Markets and Asia ex-Japanare still the leaders. But on anabsolute basis, Global bourses arejoined at the hip with US stocks.

Bonds: Our three major Bond modelshave been consistently Negative (seesummary page). These particularmodels address the Long T-Bondspecifically, but in normalcircumstances they can be used tomanage long-term Bonds in general.However, these are not normal times.Typically investors buy Bonds to securethe interest income. And corporationsissue Bonds when the cost of debtcapital is less than rate of return ofbusiness enterprise. Lately, however,investors bought T-Bonds irrespectiveof the coupon in order to protect themarket value of their portfolios. Andbusinesses have sold Bonds irrespec-tive of a steep yield curve, becauseshort-term funding dried up. We thinkthe long-term interest rate supercycleturned up in 2005 and will continuehigher for at least a decade. Therecent spike down to new lows on T-Bond yields was due to a counter-trendforce majeure. The Oow Jones BondAverage presents a better picture of thelong term direction of interest rates.

7,006,756,506.256,005,755,50

The Bond Yield/Stock Yield Ratiostill favors Stocks over Bonds--andspread product over Treasuries. Thistrend is getting old and needs tocorrect, but that is not enough reasonto re-allocate from equity to debt. Eightconsecutive days in the same directionare extremely rare in most tradingmarkets; but we have seen the NYSEBond Exchange advance/decline moveup thirty-some days-in-a-row. JunkBonds are up 13 consecutive sessions,but market mechanisms within the Junkvenue are such that this long streakdoes not yet constitute a Sell signal.

Gold: Our models are Positive,demanding some exposure here. Weare retaining core holdings but are notaggressively long in trading accounts.

Commodities: We are finally makingmoney on our Commodity trade, just asthe market is getting overbought. Butas long as everybody is worried aboutexcess Crude Oil inventories we will tryto stay long--"sell shortages, buy gluts"the old trading aphorism says.

The Dollar: We have been short theDollar for two months, but the modelsare now Mixed. We have no insightinto this market at present and may exit.

Junk Bonds diverged bullishlyfrom Stocks at the March 9 low.

7,006.756.506.256.005.755.50

21602100204019801920186018001740168016201560150014401380132012601200114010801020

960900840

The arrows indicate the orthodox supercycle high in Bonds, low in long-term interest rates. Underthis viewpoint, the 2008 spike up, by Treasuries alone, was a non-interest rate related aberration.

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/

/

114112110108106104102100

9896949290888684828078767472706866646260585654

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The chart below and the twotables thereon can be used to illustratethe respective appeals of two verydifferent philosophies of Stock Marketinvesting. The table at lower rightshows that even after the horridmarkets we have recently experienced,Stocks have still generated an averageannual return of 91'2% since 1926.Furthermore, investors who held for10-year periods of time showed a netgain in 97.3% of the cases. Andinvestors patient enough to hold for 20-year periods of time have enjoyedgains in 100% of the cases. Thisrecord suggests to many that a Buy-and-Hold approach is certainly aneminently appropriate investmentstrategy--if not the most successfulstrategy.

This same chart, however, alsoillustrates the appeal of "MarketTiming," which is quite the opposite ofa Buy-and-Hold strategy. Since 1934

there have been nineteen 4-year spansof time (demarcated by vertical dashedlines). Most of those quadrennialperiods witnessed at least onesignificant decline, the average ofwhich was -26%. Furthermore, actualStock market lows (arrows) have comereasonably close to the theoretic 4-year cycle lows (dashes). The severityand the regularity of these declinessuggest to some investors that,theoretically, anyway, Stock marketreturns can be increased, and Stockmarket risks can be decreased, byavoiding equities during the periodicbad times, such as illustrated here.

We feel that both views havemerit, but at certain times MarketTiming seems absolutely vital. This iswhy in early 1999 these pages warnedthat the Stock market was once againapproaching one of its periodic sinkingspells. However, what we foresaw atthat time was not just a normal cyclic

132201150010004S70375706586572949834335377131S1285424832160IS79163414221237\076

9368147086165364664063533072672322021761531331161018876

Begin Dale End Date % Gain02105/1934 07/26/1934 ~22,8%03/10/1937 03/31/1938 -49.1%09/12/1939 04/28/1942 -40.4%05/29/1946 05/1711947 -23.2%06/15/1948 06/13/1949 -16.3%01/05/1953 09/1411953 -13.0%04/06/1956 10/2211957 -19.4%12/13/1961 06/26/1962 -27.1%02/09/1966 10/07/1966 ·25.2%12/03/1968 OSI26f1970 -35.9%01/11f1973 12/06/1974 -45.1%09/21 f1976 02128f1978 -26.9%04/27/1981 08/12/1982 -24.'''1"08/2511987 10/19/1987 -36.1 %07116/1990 10/11/1990 -21.2%01131/1994 04/04/1994 -9.7%07/17/1998 08131/1998 -19_3%03119/2002 10f09f2002 -31.5%05f10/2006 06/13/2006 -8.0%

132201150010004

8703757065865729498343353771328128542483216018791634142212371076936814708616536466406353307267232202176153133116101

8S76

00--- m> ~m Q)°E"'C --Q).!!!z<.l

00

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decline, such as those illustrated here,but rather a generational, or"supercycle," correction. There were adozen relatively unconventionalreasons we expected marketdiscontinuities soon would present,which would be much more seriousthan what investors had come toconsider normal. To follow up on that1999 piece, in recent weeks we haveproffered our current assessment ofseveral of those dozen reasons. Wesummarize below:

Solar Activity: Various researchershave reported, based on evidencefrom 500 BC to the present, thathuman excitability and activity fluctuatewith solar intensity as measured bysunspot activity. Wars, economicactivity, bull markets, and favorablecorp harvests tend to increase assunspots increase. Conversely as theSun becomes quiescent, globaltemperatures tend to fall, crop harvestsbecome poorer, and the economy andfinancial markets suffer. The mostrecent solar cycle peaked in intensityin July 2000, and has declineddramatically into the present day.Some researchers now argue that onApril 19th solar activity at last began anew cycle of increasing intensity. Thisconclusion is not unanimous, but if thisis indeed the case, then the horridStock market decline from 2000 to2009, should be giving way to aseveral year advance. That is thegood news. The bad news is that thecurrent 11-year sunspot cycle, Cycle23, has generated the fewest sunspotsin a century. The last six decades sawfive of the ten most intense solarcycles on record. And the hyper-activeSun which characterized those yearscorrelated with the most productiveagriculture on record, the greatest

economic advances ever, and themost intense bull markets in Stocksever seen. But l! the Sun is changingphase-and going into a century or soof relative quiescence--then periodicbull markets in the future should berelatively modest affairs as comparedto those of the 20th century. (On theother hand, world wars should bemuch less likely in the 21st century thanthey were in the 20th

).

Financial Engineering: During the greatbull market from 1990 to 2000 or so,Financial Engineering, e.g., Mergers &Acquisitions, Share Buy-backs, LBOsand Private Equity deals, probablyadded some 6% or 7% a year to thetotal return from NYSE Stocks. Sincesuch activity ended, the Stock markethas dropped the "47%+" we predicted,so the worst effects may now be over.But the debt associated with previousdeal activity could still constitute aheadwind of sorts. Consequently, theprevailing level of Stock returns overthe next decade or so should be lowerthan it was during the deal days.

Dividend Yields: There are thousandsof stock market "indicators," and manyinvestors and analysts assume thatDividends are just one among many.Such a dismissive attitude isinappropriate in our view becauseDividends are not just an "indicator;"they are one of just two factors whichconstitute an investor's return.Historically, nearly half the total returnfrom Stocks (9% annually) has comefrom the compounding of Dividends.Furthermore, over time total returnsare highly sensitive to initial conditions.If one initiates stock market investmentat a time when Dividend Yields areabove normal, one's total return overtime typically will be above normal.

Conversely, if one initiates hisinvestment when yields are sub-normal, his long-term total return islikely to be sub-normal. DividendYields were at an historic low in 2000,making good returns from that point onhighly unlikely. From their 2000 low totheir 2009 high, Dividend Yields havetripled, making Stocks much morereasonable today than they have beenin some time. But even after tripling,Dividend Yields are still well belowtheir 4~% historic average, and hencewill continue to work against high stockmarket. total returns in the yearsimmediately ahead.

Stock Prices: As noted, the TotalReturn from a security, or market,consists of only two factors. One is theDividends or Coupon payments theowner receives over time. The other isthe difference between the Price paidfor that security and the Price realizedwhen it is sold. The outlook for StockPrices is our theme for this week.

While the estimation of futureStock Market Dividends is difficultenough, predicting the Price of theStock market through time is infinitelymore difficult. The typical methodused to forecast Stock prices is to tryto forecast some supposedly moretangible, physical factor through time--such as Dividends or Earnings or BookValue or Sales or Discounted Net FreeCash Flow. When one or more ofthese "fundamental" factors have beenestimated, then a relevant multiple isapplied to the resultant data in order toestimate the future market Price of thesubject security or market.Unfortunately, this method ofprediction has a painfully flawedrecord. In fact, even in retrospect,these methodologies are totally "time

dependent;" i.e., sometimes the actualPrice data align with what theorysuggests, but sometimes they deviateby 50% or 100% or 200% or more--rendering the laborious effort worsethan worthless.

The one thing all theconventional--and failed--attempts atStock Price prediction have in commonis that they try to predict Prices on thebasis of something else--somethingbelieved to be "real," such as"earnings" for example. There is oneanalytic discipline, however, thatconsiders Prices themselves to be theultimate reality. This discipline ignoresall the "fundamental" factors thatsupposedly "cause" Price fluctuations,considering them to be distractingepiphenomena. This methodology isbroadly known as "Chart Reading," themost refined and potentially successfulform of which is expressed in ElliottWave Theory.

Elliott theory assumes that Stockmarket Prices at all times follow one ofa very limited number of precise, pre-defined patterns. By identifying whichpattern the subject market is currentlyfollowing--and then ascertaining thatmarket's position within the positedpre-defined pattern--the skilledobserver, ideally, can forecast thesubsequent Price behavior of thatmarket. While even skilled observersoften will fail to predict pricesprecisely, Elliott theory has built-inself-correcting principles.Consequently, when an Elliott forecastgoes wrong, it will not stay wrong, asmany conventional protocols tend todo. Not being an expert in Elliott, wereport here the probable future ofStock Prices as viewed by Elliott WaveInternational.

According to Elliott principles, a"Five Wave Progress Pattern" impliestermination, or "completion." The chartbelow shows that in 2000 stock Priceshit their "Fifth Wave" peaks at "ThreeDegrees of Trend' simultaneously.More specifically: (1) The 5-wave rallyoff the 1974 low reached itscompletion; (2) It did so coincident withthe 5-wave rally off the 1932 lowreaching its completion; and (3) the 5-wave rally off of the 1784 low (notshown) simultaneously reached itsnatural terminus.

1500010000

CHANNEL FOR WAVE (V)Dow Jones Industrial Average

(Current Dollars)

declined 56.8% into the close of March6,2009, thereby exceeding every otherStock market decline since 1974 andsince 1932. Unfortunately, Elliottexperts count the 2000 top as alsomarking the end of the 5-waveadvance from the low of 1784. Andthe recent 56.8% Bear market declinehas not exceeded the biggest declinesince the 1784 low. The declines of1835-1841 and of 1852-1857 and of1929-1932 were all worse than ourrecent experience. Consequently,according to Elliott, after the current

......---- ....------ rally is done, anotherdecline, below the Marchlow is in prospect.

There is oneobvious Stock Marketdynamic that can, but notnecessarily will,compromise virtually anylong term forecast forStock or Bond Prices.This dynamic has to dowith the unit of account inwhich security Prices aredenominated. In thiscountry we are used to arelatively stable unit of

© May 2009 Ellio~ Wave International (w\fJw.elliottwa",e.com) account; viz., the U.S.119405 19605 19805 I 2000s1

--_ .. =-. Dollar. Other countriesWe do not know what the have not had the same experience.

implications of 2000's triptych of Fives For exa m pie, th e Germ a nare in detail, but we do know in Deutschmark, the French Franc, thegeneral. The fact that the 2000 peak Brazilian Real, the Mexican Peso, thecompleted the 5-wave advance off the Indian Rupee, the Chinese Yuan, the1974 low, implies that a decline from Russian Ruble, etc. all have beenthe 2000 high should exceed the essentially wiped out one or morebiggest decline since 1974. And the times during the last century or so. Iffactthatthe 2000 peak also completed the U.S. Dollar is ever similarlythe 5-wave advance off the 1932 low compromised--which may be a historicimplies that an ensuing decline should inevitability--cetera paribus Stockbe the greatest decline since 1932. Prices would likely rise, since theyBoth of these forecasts have now represent a proportional ownership inbecome fait accompli, as the S&P 500 certain Real Assets; e.g., property,

5000

2500

1000

500

250

100

50 2

c(IV)

this linewill be

resistance inthe future

plant, equipment, inventory, and thelike. This "Real Asset" characteristicof equities should put a "lesser of evils"bid under Stock Prices, even in verypoor economic circumstances. Thiswas clearly the case in WeimarGermany, to mention just one ofinnumerable examples.

Currency values, or "exchangerates," constitute a potentiallydisruptive variable within the Capitaland Commodity market equations. Forlong periods of time, measured indecades if not centuries, Currenciescan be relatively well behaved, and ofno material concern to investors. Thisis particularly the case with investorswhose assets and liabilities aredenominated in the same unit ofaccount. But every now and thenCurrencies totally jump the track, andinstead of "regressing to mean," as istheir wont, they accelerateuntil various exchange ratesamong these units ofaccounts approach zero orinfinity. At such times evenportfolios whose assets andliabilities are denominated inthe same Currency could beeffectively destroyed--depending upon the "mix" oftheir assets. This is thecase because suchdiscontinuities affect variousasset classes quitedifferently. "Real Assets,"such as Commodities andStocks and Real Estate willact quite differently from"Financial Assets," such asCash and Bonds andAnnuities. In order to avoidthe potential disaster such aforce majeure could cause,we must constantly monitor 1980

the Price of our assets, not just innominal terms, but in relative terms aswell; for example, Bonds relative toStocks, Stocks relative to Gold, Goldrelative to Bonds. That is the purposeof the Bond Yield/Stock Yield Ratioshown here often. That is also thepurpose of the chart below showingDow Jones in Ounces of Gold.Following this algorithm a portfoliowould have been predominately inStocks for most of the time from 1980to 1999; and would have emphasizedGold since 1999. By constantlykeeping our wherewithal in thestrongest asset class we should beable to survive whatever happens toStocks, Bonds, Commodities orCurrencies. Such an approach workedin Weimar Germany, it worked in theGreat Depression, it worked in Japan's"lost decade" and it has worked in theU.S. since the highs of 2000.

oz.45

40

35

30

25

20

15

10

Down83% 5

TopHOW THE BEAR MARKETLOOKS SO FAR PRICED

IN REAL MONEYDJINGold weekly

(AA812)

2401~ 220

200180160140120100

80604020

1985 1990 1995 2000 200S

© Copyright 2009 Ned Davis Research, Inc. Further distribution prohibited without prior permllilon, All Allntl Aeeerved.See NDR Disclaimer at www~ndr.com/copyright.html. For data vendor dleclelmerl refer to www.ndr.oomlvendorinfo/.

When the" DJIA/Gold" ratio pictured onthe previous page is going up, stay in Stocks.When it is going down, stay in Gold. When the"Bond Yield/Stock Yield' ratio shown to theright is going up, stay in Stocks. When it isgoing down, stay in T-Bonds. When the"Government Bond/Gold Bullion" ratio shownbelow is going up, stay in T-Bonds. When it isgoing down, stay in Gold. Whether the sUbjectratio is going "up" or "down" must bemechanical, purely price-based determination.Tools such as Moving Averages, Point &Figure algorithms, MACOs and other similarprotocols are appropriate to this task.

98765432

Bond YIeld/Stock YIeldUSA 1972 - 2009

)73 ) 0 ) 0

IIIIIIIIIII

II~~

./

Bond/Gold Ratio Rising = DisinflationaryBond/Gold Ratio Falling = Inflationary

...•.0

24022020018016014012010080604020

CAPITAL MARKET SUMMARYAs of May 10, 2009

MAJOR MODELSDomestic Stocks Long Term**

Intermediate Term**Short Term**

Positive**Positive**Negative**

U.S. Treasury Bonds Long TermIntermediate TermShort Term**

NegativeNegativeNegative**

US Dollar Long TermIntermediate Term**Short Term**

PositiveNegative**Negative**

Energy Stocks

Global Developed Market Stocks

Global Emerging Market Stocks

Japanese Stocks

China Stocks

Global Government Bonds - Hedged

Global Government Bonds - Un-hedged

Emerging Market Bonds

Junk Bonds

TIPS

ZEROS

Capital Market Class (dedicated portfolio)**

Domestic StylelVenue/Sector**

Bond Put/Call Ratio Level

Negative

Stocks over Bonds over Cash

Mid Cap/Asia-Ex/lnternet**

Very Positive

18

17

16

15

14

13

12

11

10

9

8l ..

7

6

5

4

3

2

Treasury Bonds have out-performed Stocksover the last 20 years--g.O% to 7.6% per year.

-.......,~~·"rl

1%5

18

17

16

15

14

13

12

11

10 ....•.!'.)

9

8

7

6

5

4

3

2

© Copyright 2009 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/v!:Jndorinfo/.