July 5, 2008 Update

Updated comments for July 5, 2008 in Italics. Bold comments from the February 3, 2008 update.

Folks, this is my mid-year updated VR Forecaster Report. For those of you who have followed my reports over the years you know that I do not change the Annual Forecast Models, but I do update commentary as needed and you will see that below written in italics. I have kept the original (mid-January, 2008 commentary) and the February 3 commentary intact. If further updated commentary is needed before now and year-end 2008, I will email each of my clients and inform that updated commentary has been posted. In the absence of that update, the next VR Forecaster Report will be published mid-January, 2009.

A picture is worth a 1000 words, so we'll try and keep our commentary brief.

Thank you once again for subscribing to the VRTrader.com Annual Forecast Model. In our opinion, you have in your hands one of the most unique market investment/trading tools in existence. Since you've already paid for it, you know that this is not sales hype, it is fact! While no indicator is perfect, especially the AFM, its uncanny record in calling significant turning points and overall trend for the stock market is, in my experience, unparalleled, especially since it is published early in the year and looks out 12 months in advance. The VR Forecaster (Annual Forecast Model) has been quietly published since the early 1980s.

The AFM list of charts for 2008 repeats the format of 2007. Include herein are charts for: The Dow Industrials, Gold, the US Dollar Index, the 10-year Treasury, and Crude Oil. We have posted the 2007 charts for each of these markets, so you don't have to separately refer to last year's report, but that report is still available by clicking on 'View Last Year's Report' below.

A word of caution. My original work for the Annual Forecast Model was formulated for the Dow Industrials. Though I have had considerable success with this Model for the Dow Industrials over the years, results have been mixed for the other markets presented. It is likely that the same formulation used for the Dow Industrials just doesn't work as well for Gold, the US Dollar Index, the 10-Year Treasury and Crude Oil. Still, I will continue to present this research for our mutual edification.

We respectfully ask that you keep these Models in strict confidence. The more eyes that see it, the less reliable it will ultimately become. In other words, you don't want the #1 U.S. Market Timer for 2006, the #2 U.S. Market Timer for 2007, and the #1 Intermediate Market Timer for the 10-year period ending 2007, the #1 Gold Timer, and then present these forecasts on national television. You have paid quite a bit of money to see them. However, we do reserve the right to show small pieces of the AFM in the media for promotional purposes, especially historical results. I am, of course, referring to the Nightly Business Report on PBS where you may have occasionally seen pieces of the AFM broadcast. The following comment may sound extraordinary, but years ago I was informed by famous anonymous source that felt I had tapped into the Federal Reserve System or perhaps the Plunge Protection Team 'Model' or perhaps they were using my 'Model'. Just something to think about.

Please keep in mind this is a business where analysts such as myself who developed incredible multi-year or decade track records are judged solely by they 'last' trade. In other words, you're a bum if you're last trade was a bad call to the detriment of all your previous work. New or novice investors or those only seeking to eek out short-term gains may by chance acquire access to this 'Model' at a moment it gets out of sync and judge it harshly. Those of you, however, who have tracked these reports for several years know differently. No one can be perfect all the time and this report provides 'value-added' to your own research and insight. Regardless of whether the current signals (especially the Dow Industrials below) pan out or not, I'm sticking with the AFM, as it has served me well for over twenty years and placed my name at the top of market-timers in the United States.

For those of you new to the AFM's construction and guidelines, let me lay some ground rules. First, the AFM's construction is fairly simple. The vertical axis denotes direction and the horizontal axis denotes time. A chart zig-zagging lower is a bear market pattern, but a chart zig-zagging higher is a bull market pattern. Secondly, please note the AFM does NOT attempt to predict amplitude, but only predicts direction! In other words, the Models forecast the TIME when high and low points in the stock market may occur, not precisely high or low the market may be. Peaks and troughs can be at any level. It basically comes down to a question of relativity. Even though the chart may show a high point or a low point, there is no specific numerical value associated with that point, i.e., Dow Industrials 13,000 or 9,000. The AFM formula simply does not generate such values. In addition, new relative highs or lows in the AFM does not necessarily suggest higher market highs or lower market lows. These points could turn out to be relative highs or lows and nothing more. Thirdly, the AFM is presented in good faith as a general guide for the future. Though we make no modifications during the course of the year, we are always paying close attention to other technical, cyclical and sentiment indicators to help 'fine tune' what is unfolding in the marketplace. As we have all learned in the past, placing too much weight on any one indicator (including the AFM) may not be the best decision.

PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS!

The dates presented may or may not turn out to be accurate representations of high or low points in the market. There have been occasions when a date is coincident (a bull's eye) with a market peak or trough. More frequently, however, the actual market peak or trough is skewed either side of the predicted date. What we are looking for is the GENERAL PATTERN of the AFM in any given period. Is the pattern bullish or bearish, is the pattern rising or falling dramatically or modestly? The bearish pattern displayed in the 2000 AFM when it was published February 1, 2000 certainly presented clear warning of what may lay ahead. The low point predicted for the end of March, 2001 dramatically presented the power of the AFM to predict an excellent near-term buying opportunity. The high point predicted for the end of March, 2002 or the low point in July, 2002 also turned out to be deadly accurate presaging a multi-month correction to the downside for the former and a sharp rally for the latter. The AFM for 2003 predicted a low point in March (specifically, March 26 which was ten days off - doesn't that sound familiar? - Same thing happened in July, 2002). Last years AFM for the Dow Industrials correctly predicted a May high and a summer low. The AFM for 2007 was outstanding except for the last couple of weeks of December. It called for top in January/February, a mid-March low a high June/July, a mid-August low, a low the third week of October then followed by year-end rally - a year-end rally which unfortunately ran into a brick wall in mid-December.

DOW INDUSTRIALS for 2008:

The AFM for the Dow Jones Industrials so far presents an overall bearish but choppy pattern through the summer of 2008, but followed by what appears to be a decent recovery phase into year-end. However, there a couple of time periods that suggest we could experience sharp rally periods. It is important to note the dates on the horizontal axis as important time periods where a 'change of direction' may occur. We could see a rally peak on these dates or tradeable bottoms. Please note February 4 (February 1 was a top at 12,767), February 21 (low came the next day on February 21 at 12,155) , March 10, March 27 (Near-bullseye, low came on March 10 at 11,731. Retest low on March 17 at 11,756. There was another retest low on March 31 at 12,176), April 14 (low on 15 at 12,269), April 30 (intermediate top two trading days later on May 2 presaged the summer sell-off depicted below in the AFM), and all other dates along the horizontal axis for this purpose. In my January 20 report to you, I stated: "At this writing the market is oversold and due for a technical bounce, but using VR technical measurements there is still potential downside, e.g., 11,900, 11,750, 11,600 and even 10,680 is a potential downside target given enough time." We stopped at 11,647 on January 23 - only three days later. Talk about volatility!

It appears that overall we're going to see a low point around either March 27 or April 14 at which time a short-term rally phase unfolds either into April 30 or May 16 (This was correction. End of April/early May high coming out of a mid-March low). Monitoring sentiment and the formation of Volume Reversal ™ patterns at these times will be very important. It is my feeling we will get a better sense of what's in store for the Dow Industrials during this time period. Currently, we're rallying. If you recall last year, when the AFM predicted a low in March/April, the Dow Industrials rallied into February 9, experienced a two-day correction, and then rallied again into February 20 before turning south. Please refer to the 2007 AFM. I am not suggesting the patterns will unfold identically, but what I am pointing out is that there are many crosscurrents in the marketplace at the moment and we have to wait a bit to see how they sort out. In my daily commentary I've been leaning to the bull side (despite the AFM) because the Dow Industrials clearly held the 11,600 level (an important projected and satisfied downside target), sentiment was overwhelmingly negative, the market was significantly oversold and washed-out, the market began to ignore 'bad news' (bullish) and upside volume materialized. I have been credited with speculating that the Dow Industrials could see 11,000 and then 16,000 and I can only begin to wonder if this exactly the kind of pattern the AFM portends (Well, we're headed to 11,000 at this writing. The AFM shows a low due on August 12 followed by a zig-zag recovery phase into year-end. I cannot say whether we will have a recovery of that magnitude at this time. We will have to take it a step at a time seeking technical confirmation along the way. But, the bottom line is that cyclically based on the AFM, I cannot be bearish after the August 12-September 16 window). The pattern in the AFM is such that we could test or even break the 11,600 area again this year (risk to 10,600 if this occurs). (Well, we broke 11,600 and, so far, have traded down 11,157). Money can be made in either direction and the ultimate result could still be a significant upside move. Flexibility is the key. Back to the AFM. After a bounce into the April 30 or early may timeframe, the AFM says we should begin a zig-zag decline that climaxes on or about August 12-September 16. From there we rally into or about October 20, pullback into November 5, and then rally on/off into year-end!

I will be providing with you updates during the year, as needed, and I will notify you when they are posted on the website. In the absence of those updates, as is the custom, the usual early July update will be posted.

10-YEAR TREASURY BOND for 2008:

Last year's Annual Forecast Model (below) correctly predicted a decline in interest rates into February followed by an increase in rates into summer. However, the AFM also called for a further rate increase through year-end. This did not happen! Using technical analysis along with fundamental news developments, e.g., the growing subprime issues at the time are better explanations for the sudden shift away from the prediction made in the AFM. As you know, the AFM is based on cyclical considerations which are fixed in my work. Now, this doesn't preclude cycles from inverting which on occasion they certainly do. That said, what does the AFM predict for 2008? In the chart below we're looking at generally lower rates all year with a climactic low on or about September 16 (Rates have been low all year. They closed July 3, 2008 lower than 12/31/07, i.e., 3.973 vs. 4.035. Is it possible rates will take another nosedive in August/September as depicted in the Annual Forecast Model or will the Model invert? If stocks decline as the AFM for the Dow Industrials predicts, it only makes sense to expect money to flow into bonds to see safety). Shorter-term, it looks like we might see some tradeable swings. For example, it appears a low in interest rates around February 21 (inverted here with a high posted on February 20) may be followed by a spike in rates into the end of March (minor spike into the end of March) followed by another decline into mid-April (inverted here with rates up-ticking all through April) and yet another smaller spike into late April or mid-May (this was correct). At the risk of over-analyzing, let it be said that the general pattern is down followed by a recovery (higher rates) later in the year (if equities rally, there is a good chance bonds will decline as money moves back into equities out of bonds resulting in an up-tick in rates). Keep in mind we're looking at the Ten-Year Treasury Bond which may or may not have correlation with the Thirty-Year Treasury Bond or other Treasuries. In fact, at this writing, the TLT (an ETF mirroring the long Treasury Bonds has begun to decline suggesting long-term rates may be inching up). Also, last year's AFM inverted after mid-year, so 'looking out the window at the current weather' may very much be need again this year.

THE U.S DOLLAR for 2008:

It made sense last year at this time to expect that higher interest rates and a stronger US Dollar Index would go hand-in-hand. As we know the US Dollar Index pretty much just trended lower throughout 2007 and my forecast was essentially inverted. Last July, I wrote: "Well, it appears the AFM is inverted afterall. A high point was predicted for May 2 and a low was formed within a couple of days of that date. Subsequently, we've rallied to a mid-June peak when the AFM predicted just the opposite. I say if it works, don't fight it! The rest of the year is choppy, but the AFM calls for a low by the end of August, so I presume we could experience a rally try into that timeframe. From there the AFM calls for a rally into October 24, so we should now be looking for a decline into that date." These were essentially correct assumptions.

The AFM for 2008 is unfolding as quite volatile with biased only to slightly lower prices following sharp rally attempts. A low around February 21 is followed by a recovery into April 14-30 (February 20 was a high at 76.529 ahead of a sharp decline that carried to March 17 at 70.698 - the current bear market low!). Afterwards, a decline into the end of June unfolds (inverted here with a zig-zag recovery under way from the March 17 low up until June 13 at 74.314 - the current recovery high). Then a rally ensues into the summer leading to what appears to be a climactic upward spike on or about August 28 which is then followed by a steady decline into year-end (we'll have to wait and see here - so far the 'boy has been crying wolf'. At the same time, I would keep a watchful eye on this time period for potential extreme volatility whether the Dollar rallies or crashes). My impression is that we've got to be on the lookout for rally tries in the US Dollar Index this year accompanied by extreme volatility (If we can close above 74.314 and stay there for more than a couple of days, maybe we'll get something going to upside, but where? Upside potential is quite great if a real rally gains momentum. Target potential could be 80.00 in such a scenario or even more - see below).. Since the overall trend of the US Dollar Index has been lower, we can only presume that this overall trend remains intact interrupted only by technical rallies (This is the most logical assumption for the moment, but keep alert! Why? Everyone is bearish on the Dollar and for good cause, as we've declined 50 points in the past six years, i.e., from the Janaury 31, 2002 high of 120.80 to the March 17, 2008 low of 70.698.. A half-way retracement could even theoretically carry us back to 95.00!).

GOLD for 2008:

After a correct call for a rally peak in February, the AFM predicted a low point due by February 23 with the actual low formed six trading days later on March 5. Except for a retest of those lows in late June, the trend, as predicted, was strongly higher throughout 2007. If the forecast for the US Dollar Index (above) was correct for 2007, Gold would not have rallied. Essentially, the downtrend in the US Dollar Index helped confirm the positive Gold forecast. Looking back the fact that these forecasts were 'out of sync' was a warning that one may be likely inverted. Fortunately, for gold bugs this was not the case. Looking ahead to 2008, it appears we hit a temporary peak in early February (that peak was good for $50.00 to the downside ($931 to $885.90 over three days ending February 5) and then go sideways (or lower?) into March (the rally resumed all the way until March 17 at $1017.50, i.e., the AFM inverted at this point) at which appoint we see another upward spike. There is some downside volatility around April 30 (Bullseye as Gold took a nosedive into May 2 - two trading days beyond the projected April 30 low point), but that resolves itself to the upside into a June 4 to June 20 peak. A sell-off into August 28 then commences followed by a strong year-end rally. (Here we are!. A top may be forming here, but we need further confirmation, i.e., Negative VRs. At this writing we're overbought technically. I wouldn't sell long-term positions under any circumstance, but if we can't break through $950 in the next couple of weeks, the AFM is probably on target predicting a further correction. I should point that we could even break $950, form a double-top and still decline into August. In any event late August should be an important 'cycle change point' time frame). For now, the AFM encourages buying all dips. Unless gold begins to diverge from the inverse relationship with the US Dollar Index, we have to keep a close eye on any strength in the Dollar which could be a monkey-wrench into the gold rally. Technically, there is currently a still unfulfilled upside projection t $980 (Well, as you know, we actually traded at $1017.50 on March 17 more than satisfying this projection) in the metal itself using Volume Reversal ™ analysis and other new higher targets could easily be generated. However, I have to remind you that a correction such as the one we experienced following the May, 2006 (some $150 to the downside) can easily be seen at some point this year.

CRUDE OIL for 2008:

As I wrote last summer, I was skeptical of the AFM forecast when I published the report in early February as it appeared to me the market was oversold and the 'Street' had turned bearish. Indeed, the market turned higher and trended higher for the rest of the year. The AFM correctly predicted a low point in August and a strong rally into year-end, but it clear the first half of the year forecast was inverted.

That said, the AFM for 2008 at present calls for a steady decline into summer with a big bottom scheduled for August 28. (It is clear the AFM for Crude Oil is not operative. This is the second year running we've experienced an inversion in the cyclical forecast.) Short-term an initial low into March 10 followed by a recovery phase into April 14. (A high at $111.00 is posted on March 13 and a decline unfolds touching $99.70 on April 1). From that point on it is sayonara (It's not sayonara, it's konichiwa or good day! Just the opposite. According to the AFM we're down into August 28, but will the opposite occur? In any event, we have to keep an eye on this critical August/September period for potentially great volatility). From that point on it is sayonara. A recovery phase from August 18 until early December 10 (this might be the time we see Crude Oil sell-off using the inversion approach) then unfolds followed by a year-end sell-off. Clearly, the inverse relationship with the US Dollar Index has had a bearing on Crude Oil prices and has to be monitored. After seeing the AFM inverted for the first half of 2007, we cannot take this forecast carte blanche and stay on our toes.(That's darn sure! Watching the dates on the horizontal axis for possible 'changes of direction' is the key at this time).

Thank you for subscribing to the 2008 AFM. May I extend my very best wishes to you for a happy, healthy and prosperous year. Interim updates will be announced via e-mail as they are needed, but the next official update is scheduled for early mid-January, 2009 when the new VR Forecaster Report is published.

Mark Leibovit,
Chief Market Strategist
VRTrader.com
July 5, 2008

View Last Year's Report