beringer weinstock group - ta signals

8/2/2019 Beringer Weinstock Group - TA Signals

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DanWantrobski, CMT

215-665-4446

[email protected] STRATEGY

October 14, 2009

Equity Research

Industry Report

Fourth Quarter 2009 Outlook

INVESTMENT CONCLUSION:

We remain of the opinion that U.S. equity markets reside within a cyclical bull market- born between the October 2008lows and the March 2009 lows. Cyclical uptrends tend to be multi-month (oftentimes multi- year ) phenomenon that provide a rising tide for most sectors and stocks to enjoy. We believe the current tide can carry us into the New Year andallow the S&P 500 to reach targets within the 1140-1180 region. Though nominal lows for this structural bear marketcould have been finalized via the 666 print on the SPX back in March, we highly doubt that the U.S. markets areembarking upon a new secular bull market right now. In fact, we strongly believe that current strength will be met by yetanother cyclical bear market in the years ahead (possibly as early as 2010), which will serve to carve out a multi-year trading range in the key benchmark indices and eventually exhaust the secular bear (in place since 2000) once and for all.

KEY POINTS:

• Markets remain oversold, internal lows present a positive divergence, the 'best summer ever' bodes well for year-end, breadth has been strong and banks are participating- all feathers in the cap of our current uptrend

• Looking for SPX targets within 1140-1180; Dow targets within 10,400-11,000; and NASDAQ targets within2400-2600

• Despite our bullishness heading into Q4, we still believe the markets remain within a deflationary bear marketoverall- and that key ingredients (such as technical breakouts, valuations, demographics, and credit expansion) arenot yet in place to warrant the call for a new secular bull market in stocks

• The U.S. dollar will continue to play an important role in the months ahead

• Interest rates likely to remain range-bound, but at historically low levels, as we continue on within a deflationary bear cycle

• Commodities remain within a secular uptrend, through recent strength has pushed the precious metals intooverbought territory as we head into Q4 2009

Research Analyst Certifications and Important Disclosuresare on page 33 of this report



U.S. Equity Markets Within Cyclical Uptrend…

We remain of the opinion that U.S. equity markets reside within a cyclical bull market- born between the October 2008

lows and the March 2009 lows. Cyclical uptrends tend to be multi-month (oftentimes multi- year ) phenomenon which

provide a rising tide for most sectors and stocks to enjoy. We believe the current tide can carry us into the New Year andallow the S&P 500 to reach targets within the 1140-1180 region. Though nominal lows for this structural bear market

could have been finalized via the 666 print on the SPX back in March, we highly doubt that the U.S. markets are

embarking upon a new secular bull market right now. In fact, we strongly believe that current strength will be met by yet

another cyclical bear market in the years ahead (possibly as early as 2010), which will serve to carve out a multi-year

trading range in the key benchmark indices and eventually exhaust the secular bear (in place since 2000) once and for all.

A. Markets Remain Oversold on Long-term Charts

All three indicators we track- stochastcs, MACD, and RSI- are still trending higher from oversold territory on thelong-term monthly charts of the S&P 500. This comes after the index reached some of its most oversold conditions in

modern history, off the back of its 2008-2009 decline. In particular, the monthly MACD indicator (center) hastriggered a cyclical ‘buy’ signal due to its recent bullish cross.

SPX: 1076.18

Still bullish!

Here is what we are currently looking at:

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DJIA: 9851.86

The Dow Jones Industrial Average sports the same bullish set of indicators at this time as well. As we can see

via the long-term monthly chart above, stochastics, MACD, and RSI are all trending higher from deep oversold

territory. Furthermore, the MACD indicator (center) sports a recent bullish cross and has quite a distanceto travel simply to mean revert back to its zero line.

Comparisons to the 1929-1932 period have the bears awaiting another major down wave (and soon…), which

would bring us to new lows (below 666 on the S&P; below 6469 on the Dow) within the next several months.

The MACD indicator would disagree with this assessment- and instead suggests that any short-term weakness /

retracement in the market should be used as a buying opportunity.

DJIA: 1924-1946 1929

1932

The monthly MACD on the Dow triggered a bullish cross from deep oversold territory in 1932. It signaled the

cyclical bull market from the 1932 lows to the 1937 peak- a 5-year run that witnessed a nominal gain of more

than 200% for the Average. Furthermore, from 1929 to 1932, this MACD indicator gave no false signals-

remaining bearish for the entire decline until the bottom was achieved in 1932. Though history does not repeat

itself, we believe the current position and cross of the MACD bodes well for a higher Dow into 2010 as the

indicators reverts back to its zero line on these monthly charts.

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COMP: 2132.32

The NASDAQ Composite (COMP) also sports bullish indicators on its monthly charts. As we can see in the chart

above, the stochastics, MACD and RSI are all still trending higher from their recent oversold position. And here

again, the COMP is sporting a bullish MACD cross. There is one caveat in regards to the COMP however: the

index- through leading the charge technically in the market rally thus far, has pushed itself into its declining 30-

week moving average (red line; upper red circle above). The moving average currently resides at 2165 and may

present the index with some stiff resistance on a short-term basis. Bullish support from this longer-term perspectivewould come at the COMP’s rising 10-month line, which currently sits near the 1800 zone. If we are indeed within

a cyclical uptrend, the index should have no problem punching through its 30-week in the months ahead, en route

to targets north of 2,500.

B. 80-Month MA Indicator Supports Cyclical Bull

Even though an overbought correction can hit us over the short-run, the long-term charts still have us trending

higher from deep oversold conditions- in fact with plenty of room to run higher before the markets become

overheated on a cyclical basis. Though we have shown this condition mainly through the use of the MACD line,

have a look at a lesser known indicator that we take out from the vaults during market panics- the 80-monthmoving average indicator:

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C. Extremes Reached in 2008: Positive Divergence

In the long-term chart above, we plot the monthly close of the S&P 500 (black line) against its 80-month moving

average indicator (gray line). This indicator performs like an oscillator- running between overbought and oversold

market conditions on a very long-term scale. When market panics occur (in fact during most of the cyclical bear

markets of the last 100-years or so), we will typically see the indicator break below the zero line (0%, shown via the

red dashed line above) as the market lodges itself into deep oversold territory.

It is rare for this indicator to register extremes well below that zero threshold. In fact, we note through the red circles

above where the indicator posted a reading at or below -20% (indicating extreme levels had been reached): 1932,1942, 1974, 2002, and 2009. Each of the instances prior to 2009 proved to be a cyclical market bottom (where

1942 is believed to be a secular market bottom by some historians). In other words, the panic of ’08-’09 has put us in

some good company, historically speaking.

Furthermore, what is intriguing about this indicator is that it tends to revert back to the zero line (and in many cases

beyond), once such extremes are reached. Notice that according to its current location then, there is still some

distance left to travel upward before we hit neutral territory. This in fact bodes well for the presence of a cyclical

uptrend in our opinion- one that can potentially take us past 1100 on the S&P into the New Year in our view.

The chart above illustrates the fact that the U.S. equity markets actually made an internal low last year during the

October-November capitulation phase- when new 52-week lows reached an extreme reading (white circle above).

This level was the highest since the 1998 emerging markets crisis and 1987 crash (which both occurred against the

backdrop of a secular bull trend), eclipsing even the levels reached during our last cyclical market bottom in 2002.We now know that the indices went on from their October-November levels to make new nominal lows this past

March against a much smaller portion of new 52-week lows: this is a sign of positive divergence; a signal of sellingexhaustion – which is ultimately healthy for the markets from a technical perspective.

October ‘08

March ‘09

New 52-week Lows

The markets made lower-lows on

fewer new 52-week lows- a sign of

exhaustion, and a positive

divergence in our opinion.

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The ‘sell in May’ trading strategy did not work this year. In fact, we had one of the best summers ever in terms of

nominal returns in the U.S. equity markets. But does this seasonal phenomenon hold any implications for year-end 2009?

We believe it does.

We looked at the historical data of the S&P 500 dating back to 1900 and found some interesting statistics. They supportour case for a cyclical bull market and a solid close to 4 th QTR 2009. Take a look:

x From the close of April 2009 to the close of July 2009, this year ranked as having the 8th highest 3-monthsummer return on the S&P dating back over 100 years:

Highest 3-month Summer Returns on the S&P (April Close to July Close)

1 1938 27.8%

2 1933 19.7%

3 1935 19.4%

4 1997 19.1%

5 1936 15.2%6 1955 14.7%

7 1980 14.5%

8 2009 13.1%

9 1989 11.8%

10 1942 11.7%

x But what is perhaps more compelling is that post these 10 best summers, the S&P rallied another 8% onaverage into year-end. Take a look:

July through December Returns post the “best summer ever”

1935 21.3% Secular Bear1942 14.1% Secular Bear

1980 11.6% Secular Bear



1955 4.5% Secular Bull




2009 Secular Bear

The table above shows how the S&P performed after the top ten April – July closes. In other words, we calculated thereturns for July through December (the remainder of the year) after each of these ‘best summers’ (and obviously excluding

this year). In 100% of the cases, the S&P witnessed positive returns from the end of July to the end of December. The

best years were 1935 and 1942, and the worst year was 1933. The average nominal return for all years in the top 10 was

8%. Note also that a majority of these ‘best summers’ occurred during secular bear markets.

D. 'Best Summer Ever' Signal Bodes Well for Q4

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x When we use this data to calculate some potential year-end target zones for the S&P 500, we get the following:

o If the index falls at the low-end of the range of returns (in line with 1933), it would imply a year-end level

near 1002. We are well past this target as of October 2009.

o If the index performs on average with all data points in the this study (8% return), it would imply a year-end

level near the 1066 zone- we reached this milestone when the index traded to our target zone of 1040-1080

just a few weeks ago, and have recently tested this zone as support in early October.

o If the index falls at the upper end of the range of returns (1935), it would imply a year-end level near 1197-

essentially in line with the S&P’s declining 30-month moving average (which will be just below 1200 nextmonth).

It still may not be easy sailing into year-end…

In our study of these ‘best summers,’ we also found that a majority of them witnessed a sizable correction between the July

close and the December close (so far, we haven’t had one…)- the four exceptions were 1935, 1936, 1942 and 1980- and as we

can see from the chart above, these were the top four best performers for the remainder of the year. This suggests to us that2009 can still witness a correction or retracement in the fourth quarter that is bigger than our summer retracement(which proved to be rather shallow).

The average magnitude of a second half correction in these ‘best summer’ years was around -13% from peak to trough. This

implies that if the recent highs near 1080 were to be the temporary peak heading into year-end, a correction or retracement

could take the S&P down toward the 940 zone before rallying again. We believe the 50-day moving averages will be the firstalert to such a development- for now, they are still rising- which suggests we should remain fully invested.

Despite the common belief that summers and the stock markets don’t mix, 2009 managed to make history. If we look at how

the other ‘best summer’ years played out heading into the 4th

quarter, it gives us a generally positive picture for year-end ‘09.

Of course, this data also tells us that the road to December will not be without its bumps; but clearly at this time statistical data

argues for a long position in the equity markets, with perhaps an opportunity to pick up more shares at cheaper levels in the

weeks just ahead.

E. Bonus: The ‘Best Summer Ever’ Ended on a Positive Outside Month…

SPX: 1069.31

Not only did the U.S. equity markets give us one of the best summers in modern history, it ended with positive outside months

being posted on the SPX, Dow, and COMP- as well as a host of sectors that make up these indices. Positive outside months

are a reversal phenomenon- where higher highs, lower lows and a higher close over the previous month are all recorded.

Though in and of themselves they cannot trigger full-blown bull markets, when combined with other long-term technical

attributes (such as we have noted in this report) they can help support the argument for a multi-month period of rising equity

prices.

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BKX vs SPX

BKX underperforms as sign of

impending 2000 market top…

Banks begin

outperforming prior to the

cyclical bull market of

2003-2007

Banks break down

in early 2007

Thus far, this key segment of the marketplace has not only participated in the broader market uptrend, but has for the mostpart led in terms of performance (vs other sectors of the S&P 500). That is a good characteristic for any equity uptrend-and we believe it must remain this way in order for us to achieve targets just shy of 1200 on the SPX in 2010.

In the chart above, we plot the relative strength of the BKX index versus the S&P 500. Since RS charts display the same

technical characteristics as nominal price charts, we can extrapolate current patterns to forecast future performance trends.

Our current position has the banking sector still within oversold territory and reverting higher against the S&P. This implies

that the banking sector can continue to outperform the broader markets in the weeks / months ahead. Again, this is an

important development since the health of the broader cyclical bull market depends on how the banks will act in the future.

While it is still early to suggest that a major long-term uptrend in outperformance (banks vs SPX) has commenced, this

chart implies that it could take several more months to correct the oversold condition. In other words, a continued ‘mean

reversion’ higher on this chart would be a positive development for both the banking sector as well as the broader markets

in our opinion.

F. Breadth has been Supportive Thus Far

Off the March lows, we have seen very positive sector participation throughout most of the market surge. Our breadth

indicator has tracked several strong ‘buying participation’ days with relatively few ‘heavy bleeding’ sessions. As a result,

the S&P has been able to make new recovery highs and is now positive for the year on strong breadth readings

overall. This bodes well for the internal health of the markets- and suggests that interest has not been lop-sided and sector-based, but rather in stocks ‘in aggregate.’ To put it simply- so far, the engine has been firing on all cylinders in our view-

and this is a bullish technical characteristic. We would like to continue to see the SPX push higher with readings of 1500 or

greater on our breadth indicator (shown above).

G. Banks Still Acting Well Technically (No Banks, No Bull…)

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Conclusion: We are still on track for SPX 1140-1180…

We believe that current technical conditions are conducive to higher index levels into 2010. This is not to say there is no

downside risk right now (in fact, we will address our feelings regarding this Q4 risk in the next section). Rather it suggests

that the primary market trend has shifted (from cyclical bear to cyclical bull), and this is likely to carry stock prices higher

into next year in our view. We continue to look at the following levels as potential upside targets in the months ahead:

SPX: 1072.86

A 50% retracement of the prior bear decline-

coupled with this cyclical downtrend line

(red circle) and the index’s declining 30-

month moving average suggest a resistance

range within the 1140-1180 zone on theS&P in the months ahead.

DJIA: 9878.47

A 50% retracement of the prior bear decline-coupled with this cyclical downtrend line (red

circle) and the index’s declining 30-month

moving average suggest a resistance range

within the 10400-11000 zone on the DJIA in

the months ahead.

COMP: 2141.25

The COMP has been a technical leader for some time now…the index has already broken through its respective

50% retracement (2065) and is en route toward a 61.8% retracement near the 2260 zone. We noted earlier that the

COMP’s declining 30-month moving average lies just near 2200- and this may provide some initial resistance.

However, if this is broken going forward, we believe the COMP can achieve targets within the 2400-2600 range

into the New Year.

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Keep in mind- these targets may be conservative, if history is any guide…

Past cyclical bull markets (within a broader structural bear cycle) have many times retraced 100% of the prior bear decline.

The cyclical bull from 2003 to 2007 is a prime example, but so is the entire secular bear market from 1966 to 1982:

1970 c clical bottom

1974 c clical bottom

SPX: 1967-1980

2002-2003 cyclical bottom

SPX: 1073.27

Current

If we were to see similar cyclical performance trends this time around, it would imply an S&P target in the vicinityof 1500, a Dow target north of 12,000, and the NASDAQ approaching the 3100 zone.

While we admit these targets are possible, it remains our belief that the U.S. equity markets will likely finish out the secular

bear cycle within a more muted trading range- one that may stall out before the prior cyclical peaks are met.

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‘New Normal’ for Cyclical Trends?

Our belief is that secular bear markets typically ‘go out like lambs’ instead of lions. That is to say that in the past,

a crash and final lows (capitulation) have never marked the true end of a secular bear market cycle. Rather, the market

would go on to stabilize and base-build in a series of smaller cyclical waves during subsequent years that completed a

large trading range. As the bear then ‘petered’ out in the aftermath of the final crash lows, the majority of investors

simply turned their backs on the stock markets, leaving them to the traders as valuations pushed toward historical

trough levels.

We do not expect this deflationary bear market to be an exact replica of past secular bears; but we do expect (and have

already achieved) similar developments and macro events that surround such trading ranges (such as market crashes,

recessions, massive government intervention, etc.). Furthermore, past U.S. experiences argue that we can have several

more years of range-bound / cyclical markets before the next secular trend (a bullish one) takes hold.

S&P through inflationary bear: 1960s-1980S&P through deflationary bear: 1930s-1940s

Major crash/lows

End of bear…

Major crash/lows

End of bear…

In the two historical charts above, we plot the S&P 500 from the late-1920s through the 1940s (left) and then again from

the early-1960s through the 1980s. We have indicated the final lows by red circles: these were the ‘capitulation’ points

that marked the market crash / flush-out. Note that in subsequent years, these lows were never again breached, yet the

index failed to break to new highs past its prior secular peaks. We think these charts provide some good insights into what

we can expect in the years ahead: a continued series of ‘cyclical’ market swings which are more muted in terms of size

and scope.

There is a distinct difference between these two graphs: during the inflationary bear market of the ‘60s and ‘70s, the S&P

was able to retest its prior peak (a few times in fact); while during the deflationary bear market of the ‘30s and ‘40s, the

index was unable to achieve such heights. Because we believe our current cycle puts us within a deflationary bear market,

we feel the remaining years of this bear will more closely resemble that of the 1930s-1940s period: again, a more muted

trading range that can very well fall short of prior peaks during its next few cyclical uptrends (such as the one we are

currently in).

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Within this theme of a more muted trading range going forward, we would like to state again that we do not believe

history constantly repeats, but rather rhymes with itself through long-term cycles (a similar concept to the business

cycle, though not as widely accepted by western academia….). Outside of questioning the sustainability of our recentbear market rally (which we feel more closely resembles a cyclical bull market), folks are starting to ponder whether or

not this could be our very own 1974…or 1932…or even 1982…. These years are significant to market historians

because each of them marked either a cyclical or secular stock market bottom. Though none of them created underlying

prosperity right away, from an investment perspective there was at least a final capitulation that created a floor in these

years through which stock prices would never again break.

So what if there is another scenario- perhaps suggesting that the worst is indeed over, but the aftermath may prove anti-

climatic to both bulls and bears?

What if this isn’t 1982, but rather 1938?

Over the past several years, chart comparisons between the S&P 500 during the Great Depression and the NASDAQ

Composite of today have been brought up from time to time. The comparisons are not without merit in our opinion:x Both indices peaked in an historic bubble built from years of prosperity (and culminating in greed)- the S&P

in 1929 and the COMP in 2000

x Both were considered gauges of a new age- a new economy if you will, where the S&P represented industrial /

transportation technology, and the COMP represented computer / internet technology- both promising a ‘new

metric’ of infinite rising productivity and prosperity (at their heights no less)

x Both crashed approximately 70% from peak to trough once the bubble burst- over the course of 2-3 years (the

S&P from 1929-1932; the COMP from 2000-2003)

x Both witnessed a strong 4-5 year cyclical bull market post the crash- retracing nearly 50% of the prior move

before succumbing to yet another cyclical bear decline

x Both did all of this over the course of nearly a decade… as interest rates declined and commodity prices

inflated …

To sum up- pattern, magnitude, and duration all line up in eerie fashion during the deflationary bear marketcycles of the 1930s-1940s and today- suggesting that for the NASDAQ Composite at least, it may be 1938 all overagain:

In the chart on the following page, we plot the S&P 500 from 1929 through the Great Depression (our last deflationary

bear market cycle) against the NADSAQ Composite from 1998 through present. While we understand that one week’s,

or one month’s (or even one year’s) worth of coincidence should be discarded, we are now going on nearly 15 years of

seeing these key benchmarks track each other almost perfectly. How can/should this be explained? The people that

participated in the Crash of ’29 and subsequent Great Depression are long gone…what is the invisible hand that is

driving such multi-year correlation? We believe the answer lies in our long-term cycle work- which suggests that just

like the seasons of the year, the financial markets pass through a continuous, repetitive loop- one where the singers may

change, but the song remains the same.

1938 All Over Again?

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What are the Implications

If these charts remain correlated, and we are to view our current position within the deflationary cycle as being closest to

that of 1938, it would imply that the second half of 2009 should end reasonably well but we should expect another cyclical

downturn sometime in 2010. That next cyclical bear decline is not likely to break the March 2009 lows by any significant

percentage, but more importantly- will mark the beginning of a new secular bull market in equities.

1938 was ‘the Best Summer Ever’…

As noted in the pages above, 1938 was also number 1 in summer returns since 1900- garnering an impressive 27% returnover the course of three months:

Highest 3-month Summer Returns on the S&P (April Close to July Close)

1 1938 27.8%

2 1933 19.7%

3 1935 19.4%

4 1997 19.1%

5 1936 15.2%

6 1955 14.7%

7 1980 14.5%

8 2009 13.1%

9 1989 11.8%

10 1942 11.7%

With both the S&P and the COMP losing approximately 56% off their prior cyclical peaks (the S&P in 1937 and the COMP

in 2007), we looked closer into the duration and return of the 1938 cyclical upturn:

x From its lows in March of 1938 to its intraday highs in November of 1938, the S&P gained 66% from trough to

peak. If we apply these returns to the NASDAQ Composite, it would imply an upside target of approximately

2100. This was achieved this past September- and the COMP is now hovering within this zone as we pen this

piece.

x If we were to apply this same calculation to the S&P and Dow today (using their respective March lows), it would

render the following targets:

The S&P from 1929 vs the COMP of Today

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SPX: 1075.06

…where 1120 is a 50% retracement of the 2007 cyclical bear decline for the S&P, and other technical

factors allow for targets closer to the 1140-1180 region.

…where 10,300 is a 50% retracement of the 2007 cyclical bear decline for the Dow, and we see the potential for a

“right shoulder rally” to come to fruition on the long-term charts.

The duration of recent cyclical swings appears to have increased when comparing today to 1938. Both the cyclical

bull of 2003-2007 and the subsequent cyclical bear of 2007-2009 have ‘right translated’ by several months, whichimplies that November of 2009 does not necessarily have to mark the peak of our current rally effort. Rather itsuggests in our view that a cyclical peak will be reached sometime in 2010.

With these cyclical patterns and targets in mind, let us now turn to potential risk, and how we intend to mange the

markets in the weeks and months ahead.

DJIA: 9866.30

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Risk: 4th

Quarter and Beyond…

As noted earlier, based on historical precedent we believe there is potentially 13% downside risk for the equity markets over

the next 2 ½ months. Furthermore, we believe that such a decline would provide another good buying opportunity for stocks

in general, as we are still within a cyclical uptrend. But beyond this (beyond the short-run), there still lies the risk of a more

significant downturn. Key for managing equity exposure into the New Year will be to watch the 50-day moving averages forall the benchmark and sector indices. So long as they remain in rising mode, the primary uptrend remains intact. If however

they are reversed through a correction in prices and begin to decline, we believe the markets will easily see more than a 13%

decline (which is just an average), and would likely witness a 38.2% retracement from any recovery highs.

Since the markets are rallying aggressively again this morning (10/14/09), short-term risk becomes a moving target as support

and resistance levels constantly change. For the remainder of the year- and likely heading into the New Year, we continue to

advise clients to remain long the S&P above its rising 50-day moving average (red/blue lines above). This indicator has done a

great job of keeping us in the game thus far, and we would not become majorly concerned with a new cyclical bear market

until this line starts to roll over. Keep in mind that from current levels (SPX 1085; 50-day near the 1030 zone), initial risk just

to test the line for support is approximately -5%. Though it would be nice to fade such a move correctly over the short-run, we

do not believe it represents significant danger. However, if the 50-day MA is broken and begins rolling over, we feel

momentum may gather on the downside, and this would likely lead to a 38.2% retracement. Using today’s new recovery highs

(1085), this would equate to a decline toward the 920 region going forward. A 38.2% retracement is not a bearish step

backward during primary uptrends in our view- it is only when the 50% threshold is broken that we become concerned of a

new cyclical bear market taking hold. A 50% retracement from current levels (again, 1085) would equate to a decline towardthe 875 region.

Bottom Line:Stay long above the rising 50-day moving average of the S&P- currently at 1030 (but increasing steadily each day). If this is

broken, we run the risk of a 38.2% retracement (currently the 920 zone) before another strong rally attempt. We do not grow

concerned regarding a new cyclical bear market until the 50% threshold is breached- that currently resides near 875.

SPX: 1085.52

38.2%= 920 area

50%= 875 area

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DJIA: 9957.99

38.2%= 8600 area

50%= 8200 area

For the DJIA, we believe the Average remains bullish above its 50-day moving average. That indicator currentlyresides near the 9550 zone and is rising modestly each day. If this is broken and begins to decline, we believe it

would set the stage for a 38.2% retracement off the recovery highs (which thus far is 9960, although that can

change rather quickly). Such a retracement from current levels equates to a potential decline toward the 8600 zone.

Again we feel that a new cyclical bear market would not be a major threat until we breach the 50% threshold: that

currently resides near the 8200 region.

COMP: 2160.03

38.2%= 1820 zone

50%= 1720 zone

Finally, for the NASDAQ Composite, the 50-day moving average currently resides near the 2050 zone- offering

initial support on a short-term basis. If this is broken and begins to roll over, we believe there would be high

probability of a 38.2% retracement off the recovery highs (currently near 2160, but again that level can changerapidly in sessions ahead). Such a development would equate to a downward move toward the 1820 zone for

support, followed by secondary support at the 50% retracement area of 1720. Again, we do not feel the current

cyclical bull market would be in jeopardy of unless that 50% threshold is breached.

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Overall, looking at year-end and even beyond into 2010, it appears to us that it will continue to be very

much a ‘trader’s market’ going forward. Though we are long the markets cyclically right now, we

understand the risks ahead, are watching the dollar for influence, and are constantly reminding

ourselves just where we are in the grand scheme of things….

A Looming Threat: The U.S. Dollar

We have been harping on the importance of dollar watching for several months now. We believe this currency may hold the

key between continued equity strength- or those potential 38.2% corrections.

Current dollar trading correlations (and we do not expect these to last indefinitely) are as follows in our view:

x Orderly Decline in Dollar Index: reflation / inflation trade= good for equities and commodities, good for precious

metals (what we have been experiencing for the last several months)

x Collapse in Dollar Index: bad for equities initially (knee jerk reaction; potential mini-crash or aftershock in U.S.

stock markets); potentially bullish for commodities- most especially bullish for gold and precious metals

x Rally in Dollar Index: potential unwind of the current ‘dollar carry’ trade; possible loss of confidence in ‘risk

trade’ once again (with the dollar reclaiming its distinction as a global safe haven); could also simply be a function

of oversold technical conditions within the currency right now (Elliot Wave folks predicting major rally based on

their counts)= bad for equities and commodities (as the current correlation is a negative one)

U.S. Dollar: 75.800

Low-90s resistance

75-76 su ort: we’re there!

The bottom line here is: so long as the dollar continues within an orderly downward progression and current (negative)

correlations remain intact, it should bode well for a continuance in equity uptrends going forward in our view. If however

the dollar breaks this trend in a violent manner, it will likely cause major disturbances within the equity (and commodity)

uptrends we have enjoyed this year- with the distinct possibility that those key 50-day moving averages will break and a

correction toward the mid-900 zone on the S&P ensues.

- 17 -



Forest from the Trees: Four Keys to a New Secular Bull

It has long been our contention that U.S. markets have been in the throes of a deflationary bear market cycle since

approximately 1998-2000. That the NADSAQ has been a near carbon-copy of the S&P 500 during the Great Depression

(our last deflationary bear market cycle) is unexplainable if one thinks from a linear perspective; and yet perfectly

understandable if one thinks from a cyclical perspective (especially considering that the generation which carved the

market path from 1929 to 1938 is nearly all deceased). It is our opinion that it does not matter whether or not the current

COMP/SPX correlation remains in place (and quantum mechanics suggests it won’t ): the secular market cycle is a

permanent fixture which portends the eventual end of this deflationary contraction and the advent of the next inflationary

expansion. Recall that according to our secular market model, there are four major developments that we need to see(in our opinion) to usher in a new secular uptrend:

x The stock markets must complete their base-building efforts (cyclical market swings) and break out to all new

highs (we are still well below previous peaks)

x P/E ratios for key benchmarks such as the S&P must be at trough levels (historically below 10 on the SPX).

Interestingly enough current P/E on the SPX is closer to 1938 levels than 1942 or 1982 levels…

x Secular bull markets typically have a demographic driver- the largest cohort ‘nesting.’ In the past this was the

‘Great Generation’ and the ‘Baby Boomers’ that drove our secular uptrends in the U.S.- we are now waiting for

the ‘Millenials’ to come online (still a few years away in our view)

x Velocity / credit expansion: our historical data of U.S. markets suggests that secular bull markets do not

typically occur against the backdrop of credit contraction and declining velocity of money- until these metrics

are corrected, we would expect range-bound market volatility to persist

These data points suggest that despite the market’s current uptrend, a secular transition is still some years away- and that

further pain from the stock markets is likely in the years ahead- in the form of smaller cyclical swings. Nonetheless, even

having the knowledge that we are still within a ‘trader’s market’ (and will be for some time) can aid us in adjusting our

portfolios, our lives, and our outlook to generate positive results on all fronts in the few years ahead- at least until the next

upwave takes hold in the U.S. and we can all breathe a sigh of relief. Below we look at these 4 points in more detail.

1. Equity Markets are Still Basing

x The stock markets must complete their base-building efforts (cyclical market swings) and break out to all new

highs (we are still well below previous peaks) to confirm a new secular bull

The current base for the S&P 500- the next secular bull

market will see a breakout to new highs…but there is still

quite a ways to travel before we get there…

- 18 -



The current base for the DJIA…the next

secular bull market cycle will see the Dow

easily above 14,000- likely en route to 18-

20K…once of course, our current bear cycle

ends…

Do you believe the NASDAQ can ever eclipse 5,000

again? We do…although it will likely have a radically

different makeup than what originally powered it to such a

milestone back in 2000…no matter, the ascent is likely to

take years, if not decades, in our view…

- 19 -



x Valuation: history suggests that bull markets begin when stocks are considered ‘cheap’

x P/E ratios for key benchmarks such as the S&P must be at trough levels (historically below 10 on the SPX).

Interestingly enough current P/E on the SPX is closer to 1938 levels than 1942 or 1982 levels…

This argument- that secular bull markets begin when stocks are extremely undervalued (while secular bears begin when

they are overvalued)- is driven off the long-term chart of the S&P 500 P/E ratio.

S & P 5 0 0 : P /E F r o m 1 8 8 1 - P r e s e n t

-

5 . 0 0

1 0 . 0 0

1 5 . 0 0

2 0 . 0 0

2 5 . 0 0

3 0 . 0 0

3 5 . 0 0

4 0 . 0 0

4 5 . 0 0

5 0 . 0 0

1 8 8 1 - 0 1 - 0 1

1 8 8 4 - 0 8 - 0 1

1 8 8 8 - 0 3 - 0 1

1 8 9 1 - 1 0 - 0 1

1 8 9 5 - 0 5 - 0 1

1 8 9 8 - 1 2 - 0 1

0 7 / 0 1 / 0 2

0 2 / 0 1 / 0 6

0 9 / 0 1 / 0 9

0 4 / 0 1 / 1 3

1 1 / 0 1 / 1 6

0 6 / 0 1 / 2 0

0 1 / 0 1 / 2 4

0 8 / 0 1 / 2 7

0 3 / 0 1 / 3 1

1 0 / 0 1 / 3 4

0 5 / 0 1 / 3 8

1 2 / 0 1 / 4 1

0 7 / 0 1 / 4 5

0 2 / 0 1 / 4 9

0 9 / 0 1 / 5 2

0 4 / 0 1 / 5 6

1 1 / 0 1 / 5 9

0 6 / 0 1 / 6 3

0 1 / 0 1 / 6 7

0 8 / 0 1 / 7 0

0 3 / 0 1 / 7 4

1 0 / 0 1 / 7 7

0 5 / 0 1 / 8 1

1 2 / 0 1 / 8 4

0 7 / 0 1 / 8 8

0 2 / 0 1 / 9 2

0 9 / 0 1 / 9 5

0 4 / 0 1 / 9 9

1 1 / 0 1 / 0 2

0 6 / 0 1 / 0 6

However, when we plot this data against the S&P 500, we begin to see an interesting trend emerge:

2. Valuation: Stocks Aren’t Dirt Cheap

S&P 500 / P/E

1.00

10.00

100.00

1,000.00

10,000.00

0 1 / 3 1 / 0 0

0 3 / 3 1 / 0 4

0 5 / 3 1 / 0 8

0 7 / 3 1 / 1 2

0 9 / 3 0 /

1 6

1 1 / 2 4 / 2 0

0 1 / 2 6 / 2 5

0 3 / 2 8 / 2 9

0 5 / 3 1 / 3 3

0 7 / 3 1 / 3 7

0 9 / 3 0 /

4 1

1 1 / 3 0 /

4 5

0 1 / 3 1 / 5 0

0 3 / 3 1 / 5 4

0 5 / 2 9 / 5 8

0 7 / 3 1 / 6 2

0 9 / 3 0 / 6 6

1 1 / 3 0 / 7 0

0 1 / 3 1 / 7 5

0 3 / 3 0 / 7 9

0 5 / 3 1 / 8 3

0 7 / 3 1 / 8 7

0 9 / 3 0 / 9 1

1 1 / 3 0 / 9 5

0 1 / 3 1 / 0 0

0 3 / 3 1 / 0 4

0 5 / 3 1 / 0 8

-

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

100.00

Bear

1900-

1920

Bull

1920-

1929

Bear

1929-

1942

Bull Bear Bull

1942-

1966

1966-1982

1982-2000

P/E Ratio

- 20 -



The chart above plots the S&P 500 (top) against the historical P/E of the index (trailing 12). We have denoted the secular

bull and bear cycles according to our Secular Trend Model, and have circled the peaks and troughs in the ratio. Here are

some of our takeaways:

x Peak levels in the P/E ratio tend to correspond with secular market tops (an ‘end’ of the prior secular bull

market, and the beginning of a new secular bear). Troughs in the P/E tend to correspond with an end to the prior

secular bear market cycle (though not necessarily the “bottom” of the stock market, which tends to precede thistrough in P/E by a few years).

x The P/E ratio actually conforms to a trend function on a secular basis. That is, during secular bull markets, the

P/E displays higher lows and higher highs over a multi-decade period; while during secular bear markets, the

P/E ratio makes lower highs and lower lows- similar to the nominal price action of the SPX during this same

period.

x The high-20 / low-30 range tends to mark secular peak levels for the S&P P/E, although we note that in 2000,

this ratio reached a whopping +40. This is typically where secular bull markets end.

x The single-digit range tends to mark trough levels for the P/E. This is typically where secular bull markets begin.

x Each secular cycle in P/E trend lasts roughly 15-20 years on average in our opinion.

x Our current secular trend has conformed to historical patterns thus far- and it would appear that we still have

some miles to travel within this bear market before the P/E ratio reaches the sub-10 region once again. We

currently have this ratio pegged at about 17. Keep in mind that this P/E ratio can reach trough levels in any

number of ways- including stable prices (the ‘P’) and expanding earnings (the ‘E’)- suggesting that the S&P 500may not necessarily need to crash down to 400-500 to achieve the necessary valuations for a new secular bull

market.

With a trending function on the long-term charts clearly established in our view, we started questioning whether other

technical indicators could be applied to the P/E ratio- for clearly, the markets are constantly producing smaller, cyclical

swings of which the ratio appears to correlate. Could these smaller gyrations be tracked- and more importantly, allow us

insight into potential nominal direction on the S&P 500?

It seems that they can in our opinion. We constructed an oscillator against the P/E ratio of the SPX and backtested it from

1900 to present. The results are rather compelling- and are in fact bullish on a cyclical basis in our view.

S&P P/E Ratio with Overbought/Oversold Indicator

1.00

10.00

100.00

1 8 8 3

- 0 6 - 0 1

1 8 8

7 - 0 8

- 0 1

1 8 9 1

- 1 0 - 0 1

1 8 9

5 - 1 2

- 0 1

0 2 / 0 1 / 0 0

0 4 / 0 1 / 0 4

0 6 / 0 1 / 0 8

0 8 / 0 1 / 1 2

1 0 / 0 1 / 1 6

1 2 / 0 1 / 2 0

0 2 / 0 1 / 2 5

0 4 / 0 1 / 2 9

0 6 / 0 1 / 3 3

0 8 / 0 1 / 3 7

1 0 / 0 1 / 4 1

1 2 / 0 1 / 4 5

0 2 / 0 1 / 5 0

0 4 / 0 1 / 5 4

0 6 / 0 1 / 5 8

0 8 / 0 1 / 6 2

1 0 / 0 1 / 6 6

1 2 / 0 1 / 7 0

0 2 / 0 1 / 7 5

0 4 / 0 1 / 7 9

0 6 / 0 1 / 8 3

0 8 / 0 1 / 8 7

1 0 / 0 1 / 9 1

1 2 / 0 1 / 9 5

0 2 / 0 1 / 0 0

0 4 / 0 1 / 0 4

0 6 / 0 1 / 0 8

-100.0%

-50.0%

0.0%

50.0%

100.0%

150.0%

200.0%

250.0%

300.0%

350.0%

400.0%

- 21 -



Plotting the long-term SPX P/E and a simple 30-month moving average off the data, we can calculate the distance

between these two data sets and chart it in the form of an overbought/oversold oscillator. This is illustrated in the lower

portion of the chart above. Delineating the 0% line and upper and lower boundaries, we then can observe when the P/E

ratio becomes overbought and oversold. We have found consequently that extreme readings within this indicatorcorrespond to cyclical and secular market tops and bottoms on the S&P 500.

x The indicator is constantly swinging from overbought to oversold levels. When it pushes below the -30%

region (and in some instances, considerably below the -30% zone), cyclical market bottoms on the S&P tendto occur. We noticed this phenomenon in the following years (all cyclical or secular market bottoms): 1904,

1907, 1917, 1932, 1938, 1942, 1970, 1974, 2002, 2009

x As the indicator pushes past the +30% region into overbought territory (and again, in some instances

considerably past +30%), cyclical or secular market tops are signaled. We noted these occurrences during the

following years (all tops- either short- or long-term): 1929, 1934, 1936-1937, 1946, 1955, 1987, 1998-2000

We have plotted this indicator against the S&P 500 for better visual inspection, noting past extremes in the indicator as

well as our current reading (red circle):

S&P 500 and the P/E Oscilator: 1900-Present

1.00

10.00

100.00

1,000.00

10,000.00

0 1 / 3 1 / 0 0

0 3 / 3 1 / 0 4

0 5 / 3 1 / 0 8

0 7 / 3 1 / 1 2

0 9 / 3 0 /

1 6

1 1 / 2 4 / 2 0

0 1 / 2 6 / 2 5

0 3 / 2 8 / 2 9

0 5 / 3 1 / 3 3

0 7 / 3 1 / 3 7

0 9 / 3 0 /

4 1

1 1 / 3 0 /

4 5

0 1 / 3 1 / 5 0

0 3 / 3 1 / 5 4

0 5 / 2 9 / 5 8

0 7 / 3 1 / 6 2

0 9 / 3 0 / 6 6

1 1 / 3 0 / 7 0

0 1 / 3 1 / 7 5

0 3 / 3 0 / 7 9

0 5 / 3 1 / 8 3

0 7 / 3 1 / 8 7

0 9 / 3 0 / 9 1

1 1 / 3 0 / 9 5

0 1 / 3 1 / 0 0

0 3 / 3 1 / 0 4

0 5 / 3 1 / 0 8

-700%

-600%

-500%

-400%

-300%

-200%

-100%

0%

100%

1907 19171931-1932

19381942

1970

1974

2002

2009

As the chart above indicates, a P/E indicator pushing into oversold territory signals an oncoming cyclical bullreversal (as the P/E ratio can actually ‘pull higher’ on a cyclical basis without negating its secular downtrend). Italso appears to confirm our thoughts regarding how exactly secular bear markets end: the final lows / bottom in the

stock market tends to come years before the secular bear trend actually exhausts itself. In these years, the P/E oscillator

hits its most extreme levels before signaling a cyclical uptrend- as is expected. Then, as the markets stabilize but

remain within a trading range (this time a bit more muted), the oscillator will make a higher low as the actual P/E ratio

makes its final trough (the sub-10 threshold we talked about above). Our last two secular bear cycles conformed to this

pattern: 1932 was the final low on the S&P during the bear market from 1929-1942; and 1974 was the finial low on the

S&P during the bear market from 1966-1982.

Technicians refer to this as a ‘positive divergence’- visually, it can be represented by the following:

- 22 -



Peak in P/ESecular Bear Market Secular Bull Market

Nominal lows in

stock market

End of secular bear

Higher lows in oscillator vs trough in P/E ratio

PE

P/E overbought/oversold indicator

PE

Implications for Q4 and 2010:

In March of 2009, the P/E oscillator reached an oversold level of -43.2% on a monthly closing basis. This was the

third most extreme oversold level recorded since 1900. Of the two years that beat this level:x September 1974 with a reading of -43.3%

x June 1932 with a reading of -65.3%

In our last cyclical bear market (2000-2002), the indicator reached a low of -32.6% in October of ’02 before

launching into the cyclical bull of 2003-2007.

As of October 2009, the indicator posts a reading of -11% and is trending upward toward the zero line from its deep

oversold condition. This implies that there is still room for the current cyclical bull in equities to run furtherbefore our indicator hits positive territory once again. Furthermore, as the P/E ratio of the S&P continues to grind

lower in the years ahead (remember- it still has to break that 10 threshold before the next secular bull can begin), we

would not expect this oscillator to reach the same extreme readings as this past March- but rather would anticipate

another positive divergence (via higher lows) as the bear cycle exhausts itself in earnest.

How a Bear Reall Dies…

- 23 -



Demographics & Velocity: Not Supportive of Secular Bull ( yet…)

x Secular bull markets typically have a demographic driver- the largest cohort ‘nesting.’ In the past this was the ‘Great

Generation’ and the ‘Baby Boomers’ that drove our secular uptrends in the U.S.- we are now waiting for the ‘Millenials’

to come online (still a few years away in our view)

1.00

10.00

100.00

1,000.00

10,000.00

1 / 3 1 / 1 9 4 2

1 / 3 1 / 1 9 4 4

1 / 3 1 / 1 9 4 6

1 / 3 1 / 1 9 4 8

1 / 3 1 / 1 9 5 0

1 / 3 1 / 1 9 5 2

1 / 3 1 / 1 9 5 4

1 / 3 1 / 1 9 5 6

1 / 3 1 / 1 9 5 8

1 / 3 1 / 1 9 6 0

1 / 3 1 / 1 9 6 2

1 / 3 1 / 1 9 6 4

1 / 3 1 / 1 9 6 6

1 / 3 1 / 1 9 6 8

1 / 3 1 / 1 9 7 0

1 / 3 1 / 1 9 7 2

1 / 3 1 / 1 9 7 4

1 / 3 1 / 1 9 7 6

1 / 3 1 / 1 9 7 8

1 / 3 1 / 1 9 8 0

1 / 3 1 / 1 9 8 2

1 / 3 1 / 1 9 8 4

1 / 3 1 / 1 9 8 6

1 / 3 1 / 1 9 8 8

1 / 3 1 / 1 9 9 0

1 / 3 1 / 1 9 9 2

1 / 3 1 / 1 9 9 4

1 / 3 1 / 1 9 9 6

1 / 3 1 / 1 9 9 8

1 / 3 1 / 2 0 0 0

1 / 3 1 / 2 0 0 2

1 / 3 1 / 2 0 0 4

baby boomers nestmillenials born

millenials incubate

millenials nest

2nd

gen. nests2

ndgen. retires1940s-1950s

1960s-1970s

1980s-1990s

2000s-2010s

baby boomers incubate

S&P 500 from 1942

Source: JMS

baby boomers retire

baby boomers born

The demographic debate is a hotly contested one, and current economic conditions may have the largest demographic (the Baby

Boomers) putting their retirement plans on hold for a while. But if the boomers start cashing in their holdings/investments in

retirement going forward, a capital shortfall would have to be met via investment from foreign countries or perhaps aggressive

domestic monetary policy. Otherwise, history suggests we wait until the next big demographic cohort enters the economy and

begins ‘nesting’ (marrying, buying homes, investing, etc.)- as this phenomenon seems to be correlated with past secular bull

markets. In our case, the children of the boomers (the ‘Millenials’) begin nesting and create conditions for the next secular bull-

and that may still be some years away in our opinion- as a bulk of this demographic remains college age.

V e l o c i t y

1 . 5 0 0

1 . 6 0 0

1 . 7 0 0

1 . 8 0 0

1 . 9 0 0

2 . 0 0 0

2 . 1 0 0

1 9 5 9

1 9 6 1

1 9 6 3

1 9 6

5

1 9 6 7

1 9 6 9

1 9 7 1

1 9 7

3

1 9 7 5

1 9 7 7

1 9 7 9

1 9 8

1

1 9 8 3

1 9 8 5

1 9 8 7

1 9 8

9

1 9 9

1

1 9 9 3

1 9 9 5

1 9 9 7

1 9 9

9

2 0 0 1

2 0 0 3

2 0 0 5

2 0 0

7

Secular bull market in S&P

500 from 1980s-2000

Cyclical bull

market from

- 7

Secular trading range in equities:

1960s, 1970s, early 1980s

x Velocity / credit expansion: our historical data of U.S. markets suggests that secular bull markets do not typically occur

against the backdrop of credit contraction and declining velocity of money- until these metrics are corrected, we would

expect range-bound market volatility to persist

- 24 -



Officials understand that a decline in velocity is exactly what will lead toward a greater deflationary contraction in the

months ahead. The powers that be can control the money supply- and as such, they have taken to pumping tremendous

amounts of it into the system in the hopes of jump starting the broader economy. However, they cannot control velocity-

that is, the turnover of money supply within the economy (from business to business, from consumer to business, etc.).

A widely accepted method of calculating velocity is to divide GDP by M2 (which is M1 + savings, time, and money market

deposits). We have calculated velocity dating back to 1959 in the chart above and have found some interesting correlations,though we note these are more anecdotal based on visual inspection, and should be evaluated further to see of strong

correlations do indeed exist on a quantitative basis.

Observations1. The trend in velocity correlates to both secular and cyclical trends within the S&P 500, in our opinion. We can see

from the chart above that smaller swings in velocity contributed to the range-bound, choppy market of the 1960s,

1970s and early 1980s. Then, a large “breakout” in the indicator correlated with a new secular bull market from the

mid-1980s up to the late 1990s. After the secular bull market in equities ended, we see that velocity broke down

from a major peak where it underwent one cyclical upswing from 2002 to 2007- this brief uptick in velocity

corresponded to the cyclical bull market in the S&P from 2003-2007.

2. It would appear as if trend changes in velocity lead the equity markets (gauged by the S&P 500). A good example

of this occurred in 1998: velocity peaked before peaks in the stock market (which occurred around the year 2000).

If this is a true leading indicator, we will need to see the chart above reverse higher before we can anticipate at

least a cyclical bull market in equities going forward.

3. If velocity is mean reverting, it would imply a further decline heading into 2009. Though the equity markets could

stage large bear rally over the short-run (and we believe they will), the implication from this indicator is that we

should not expect the emergence of a new secular bull market within the first half of the New Year, as there is still

room to retrace lower over the intermediate-term horizon.

Bottom Line:

Current market cycles have us enjoying a cyclical bull market in equities within a broader, secular bear

trend. This is not new territory for the markets themselves, although for a new generation of players,

events of the past few years have been nothing less than shocking. We are of the belief that the U.S.

markets have not yet transitioned into a ‘buy and hold’ cycle (a secular bull market), but rather residewithin a ‘trader’s market’- and this will remain so for the next few years.

We remain long the U.S. markets heading into the 4th

quarter of 2009, and will continue to hold abovethe rising 50-day moving averages that keep cyclical uptrends intact for a host of benchmarks and

sectors. There is risk over the short-run, but so long as these key indicators remain rising, we believe it

would be prudent to refrain from ‘fighting the tape.’ We believe the S&P 500 is still on track to reachour target zone of 1140-1180, and that may end up being a conservative estimate when all is said and

done. The U.S. dollar index is a wildcard right now, and investors should continue to monitor this key

currency going forward.

In the years ahead, we expect the range-bound scenario to continue- with the U.S likely seeing a moremuted set of boundaries in the major indices- more similar to the 1930s-1940s period, than the 1960s-

1970s.

We do not believe the key drivers for a secular bull market: technical breakouts, stock valuations,

demographics, and financial / credit expansion / innovation- are currently in place- but will likely takeyears to develop / improve. This will most likely aid in keeping the markets range-bound under volatile

conditions for the foreseeable future. Though the party rages on for now, the key phrase as we

approach the New Year will be: Caveat Emptor.

- 25 -



Interest Rates: Still a Deflationary Bear Market

As a consequence of our ongoing deflationary bear market cycle, we continue to believe that the interest rate environment

(as gauged by the 10-year note yield) will remain range-bound at historically low levels. We do not believe we have turned

the corner into a new secular inflationary regime with respect to this area of the market. Nonetheless, it is unlikely for the

directional bias of the TNX (or the TYX) to be one sided into the New Year; but rather trading opportunities are likely toabound from both the long and short sides in the months ahead.

TNX: 3.388%

The chart above depicts the 10-year note yield from the early-1980s up until today. It confirms our macro thesis that we

remain within a deflationary bear market overall: one where equities are likely to be range-bound for several years, rates are

likely to stay low, and commodities prices are likely to inflate (negatively correlated to the rate environment). The chart

also shows that at current levels (3.38% on the TNX), we are nowhere near the threshold needed to signal the onset of a

new inflationary secular cycle. For that to be confirmed, yields on the 10-year would have to push well above the 5%mark. With the lows being set in place just last year near 2%, this makes for a wide trading range in rates going forward-

easily into Q4 of 2009, and likely into the second half of 2010 in our opinion.

TYX: 4.22%

A similar multi-year downtrend in the TYX confirms our position

still within a deflationary bear cycle. The TYX sports initial

resistance near 5% and support near 2.60%- making for a wide

trading range (at historically low levels) heading into Q4.

- 26 -



Though we remain within a structural bear market in equities overall, the case for a broader cyclical trend transition (from

bear to bull) continues to accumulate compelling technical evidence.

A majority of investors watch the 2-10 year spread for underpinnings of the broader macro picture. But there is another

relationship within the yield environment which offers a very interesting backdrop to cyclical market swings: the spreadbetween the 3-month T-bill and the 30-year Treasury bond. The relationship between these ‘tails’ of the yield curve can

be quite volatile on a short- and intermediate-term basis. But when looking at longer-term data (which is needed to track cyclical market movement), we find two distinct technical attributes within this pairing:

1. The spread ‘trends’ over longer periods of time2. It tends to be ‘mean reverting’ when extremes are reached

When we compare the long-term charts of the 3/30 spread with the S&P 500, we see that cyclical transitions are signaledonce the spread reaches an extreme boundary and reverses its course (mean reverts). In other words, when the spread

reaches its upper extremes, a cyclical bull market tends to follow; when the spread reaches lower extremes, a cyclical bear

market tends to follow:

1985

1992

2002-2003 June-2009

19892000

2007

Yield Spread Conducive to Cyclical Bull?

Putting these inflection points into perspective:

x Fall 1992 (upper boundary): The S&P trading within the low- to mid-400 zone embarks upon a multi-year bull run

after the brief recession in 1991. This rally was virtually uninterrupted- until the Emerging Markets Crisis in 1998

where the markets marked an internal high before hitting nominal peaks on the S&P (as well as the NASDAQ) in

2000.

x Fall 2000 (lower boundary): The S&P hit all-time secular bull highs this year- marking a top and transition into

the next secular market cycle (a deflationary bear) which lasted until the 2002-2003 market bottom.

x Late 2003 / early 2004 (upper boundary): After staging a multi-month market bottom, the S&P staged a cyclical

transition into a new bull cycle which lasted nearly five years until 2007.

x Early 2007 (lower boundary): In early 2007, the spread pushed toward the lower extreme signaling yet another

cyclical market transition may be at hand. The S&P 500 rallied until October of that same year before succumbing

to another cyclical bear market.

x Present (2009- upper boundary): Currently, we can see that the spread has once again pushed toward the upper

boundary- closing in on historic levels where cyclical trend changes have been signaled in the past.

This is clearly a feather in the cap of the equity bulls, if history is any guide: as the upper extreme is reached within this

relationship, the case for an ongoing cyclical bull market in stocks grows stronger.

- 27 -



Commodities: Still Within a Secular Bull Trend…

In a broader macro framework, we continue to believe commodities in general remain within a secular uptrend- begun

sometime around 1998-2000 (and just as the equity markets were transitioning from bull to bear). As such, we remain long-term

bulls regarding the major commodity markets at this time, and expect to see higher levels in this sector in the years ahead. If wewere to offer up one group as a ‘buy and hold’ in our current market environment, it would be commodities- and most especially

precious metals. Below we provide a brief update on the gold and silver charts heading into year-end, and then update our call

on natural gas- which we still believe will outperform crude oil prices in the months ahead.

Gold recently hit new all-time highs- and the fervor surrounding it may have pushed sentiment over the edge. Though we like

the metal long-term- and believe it will eventually hit targets north of $1500, we are concerned that it may be too overbought

heading into year-end, and thus may suffer a setback / retracement in the months ahead. The added concern here of course is the

dollar index, which has pushed itself into deep oversold territory on a short-term basis: if it stages an strong rally, it would likely

derail much of the momentum we recently enjoyed in gold prices. We continue to believe initial bullish support resides within

the $950-975 zone, while secular trend line support now sits closer to $750.

Gold: 1063.20

Impressive breakout…nut very

overbought heading into Q4…

Silver: 17.905

Silver is also staging an impressive chart breakout- though in doing so has

lodged itself into overbought territory just as we enter Q4. We would not be

surprised by a near-term fade / retracement (especially if the dollar rallies), and

will be looking for initial support near the 14 zone in the months ahead (ecular

trend line support resides near the 9 region). We believe that longer-term, thismetal will achieve levels north of 25.

- 28 -



Short-term trading implications aside, we still believe natural gas is gearing up to outperform crude oil. This analysiscomes less from nominal price charts and trends, and more from our relative strength analysis.

Our initial call for natural gas outperformance was based on a ‘mean reversion’ trade on the following relative

strength chart:

1. The crude / natural gas ratio appears to be cyclical, while overbought levels indicate the potential formean reversion:

Natural Gas vs Crude Oil: Mean Reversion Still On

Two technical phenomena stand out on the relative strength chart of crude / nat. gas above:

x First, the ratio is extended (overbought) off its long-term trend line. Those that follow our work know we

love mean reversion trades based on the RS charts. The caveat when utilizing this study is that there is no

way to absolutely define when extremes (the ‘top’) are met. Nonetheless, at the very least such a chart

should alert traders that the risk of impending reversal in the performance of these two commodities is high

and increasing each day in our view

x Second, take a closer look at the peaks on the chart above- it would appear that since 2000, a peak inoutperformance of crude over natural gas is typically reached in the summer months- specifically

toward the latter summer months, with August showing up more frequently. Some of the reversions turned

out to be minor; while others triggered a much larger retracement back to long-term trend. What is

compelling to us at this time is that this relative strength chart remains very overbought just as we push on

into year-end of 2009

Here is the updated monthly RS chart for gas/crude:

- 29 -



Even though the monthly chart has not yet shown signs of reversal, the shorter–term RS charts (daily andweekly) have already been reflecting recent outperformance in natural gas over crude prices on a relativebasis:

A little oversold here- but the trend line break referenced above (red circle) is good for natural gas prices to

outperform crude prices in our opinion.

Daily RS Chart

- 30 -



Weekly RS Chart

In the longer-term weekly chart above, we can see that same trend line break has the RS charts testing their rising

30-week moving average (solid red line). This combined with oversold conditions on the daily charts warrant a

brief pause in relative outperformance of natural gas over the short run (until these oversold conditions are

corrected). However, note the MACD on the weekly charts: the bearish cross from one of the most overbought

readings within the last few years leads us to believe that this RS chart will eventually break below its rising 30-

week moving average- that suggests natural gas prices are likely to outperform crude oil prices on anintermediate-term basis (a time horizon which should take us into the New Year), in our opinion.

On a nominal basis, natural gas prices have thus far maintained their long-term uptrend line, dating back to 1992:

Furthermore, oversold conditions have the commodity stretched well below its long-term 30-month moving

average- a condition which warrants further upward reversion in prices going forward, in our view.

- 31 -



The Wildcard (again…)

Though we feel confident in the relative strength trends regarding natural gas vs crude oil prices at this time, on a

nominal basis the commodity could still suffer some blows- and this would likely come (at least from a technical

standpoint) from any disruption in the dollar index.

We mentioned earlier that current negative correlations bode well for rising equity and commodity markets so long as

the dollar index continues within its orderly (inflationary / reflationary) decline. If the dollar were to surprise the bears

by rallying aggressively in sessions ahead, we believe it would likely serve to deflate the recent equity and commodity

market strength we have been enjoying.

USD: 76.370

At this stage, we are still not seeing signs of a major technical reversal from the currency- and this should bode well for

continued basing efforts in natural gas prices (as well as stabilization in crude oil, even though the relative strength

charts argue for underperformance in that sector). However, a rally in the dollar past its declining 50-day moving

average (around the 77-80 zone) could be the trigger for a much larger reversal: a development which again, could hurt

the natural gas market on a nominal basis.

Bottom Line: We still believe natural gas prices can outperform crude on a relative basis…with some miles to travel

on this call in the weeks, possibly months ahead. From a nominal standpoint however, the fate of natural gas prices

most likely (still) resides in the hand of the U.S. dollar index.

- 32 -



IMPORTANT DISCLOSURES

Research Analyst Certification

I, Dan Wantrobski, the Primarily Responsible Analyst for this research report, hereby certify that all of the views expressed inthis research report accurately reflect my personal views about any and all of the subject securities or issuers. No part of mycompensation was, is, or will be, directly or indirectly, related to the specific recommendations or views I expressed in thisresearch report.

Janney Montgomery Scott LLC ("JMS") Equity Research Disclosure Legend

Individual disclosures for the companies mentioned in this report can be obtained by calling or writing Janney MontgomeryScott LLC as provided on the first page of this report. Disclosure Site

Definition of Ratings

BUY: Janney expects that the subject company will appreciate in value. Additionally, we expect that the subject company willoutperform comparable companies within its sector.

NEUTRAL: Janney believes that the subject company is fairly valued and will perform in line with comparable companieswithin its sector. Investors may add to current positions on short-term weakness and sell on strength as the valuations orfundamentals become more or less attractive.

SELL: Janney expects that the subject company will likely decline in value and will underperform comparable companieswithin its sector.

Janney Montgomery Scott Ratings Distribution as of 6/30/09

IB Serv./Past 12 Mos.

Rating Count Percent Count Percent

BUY [B] 143 48.60 5 3.50

NEUTRAL [N] 145 49.30 6 4.14

SELL [S] 6 2.00 0 0.00

*Percentages of each rating category where Janney has performed Investment Banking services over thepast 12 months.

Other Disclosures

Investment opinions are based on each stock’s 6-12 month return potential. Our ratings are not based on formal price targetshowever our analysts will discuss fair value and/or target price ranges in research reports. Decisions to buy or sell a stock should be based on the investor’s investment objectives and risk tolerance and should not rely solely on the rating. Investors shouldread carefully the entire research report, which provides a more complete discussion of the analyst’s views.

This research report is provided for informational purposes only and shall in no event be construed as an offer to sell or asolicitation of an offer to buy any securities. The information described herein is taken from sources which we believe to bereliable, but the accuracy and completeness of such information is not guaranteed by us. The opinions expressed herein may begiven only such weight as opinions warrant. This Firm, its officers, directors, employees, or members of their families may have positions in the securities mentioned and may make purchases or sales of such securities from time to time in the open market ootherwise and may sell to or buy from customers such securities on a principal basis.Supporting information related to therecommendation, if any, made in the research report is available upon request.

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