July 9, 2007 Midyear Update:

Most recent commentary in bold type!

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.

We've modified the AFM list of charts this year. For 2007 it now includes: The Dow Industrials, Gold, the Dollar Index, the 10-year Treasury, and Crude Oil. Please refer to the 2006 charts and results by click on 'View Last Year's Report' below.

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, I don't want the #1 U.S. Market Timer for 2006 and the #1 Intermediate Market Timer for the 10-year period ending 2006 to present all my 2007 forecasts on CNBC! You have paid quite a bit of money to see them. However, we do reserve the right to show small pieces of the AFM on national television for promotional purposes, especially historical results, but are less inclined to show future projections. I am, of course, referring to the Nightly Business Report on PBS where you may have occasionally seen pieces of the AFM broadcast.

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. And, the current AFM for 2007 not only correctly pinpointed a mid-March low, but a top in January/February.

DOW INDUSTRIALS for 2007:

The AFM for the Dow Jones Industrials so far presents an overall bullish picture for most of 2007. Short-term, however, the AFM points to risk beginning almost immediately from January 18 to February 6 for a high point in the market to form followed by a sharp correction that could encompass a time band stretching from February 23 to April 16 before the market turns higher. It should become obvious by mid-February and no later than March 13 whether this forecast is on track or not. Well, March 16 was pretty darn close! Regardless, it points to the period around the Spring Equinox (March 20) as being a likely market 'change point' (an important high or an important low). We're, of course, betting on the important low materializing. Before you go out there and get 100% short, keep an eye on the obvious short-term technical signals that might help confirm that a correction is in progress. A break under the 50 day moving average, a close under Dow Industrials 12,350 - 12,420, a down day encompassing a large 'range of price' accompanied by heavy volume, and a series of Negative Volume Reversals (tm) reported in our daily commentary.

Following this theoretically negative period into spring, the market appears again poised to stage another rally into Summer Solstice (June 21). The overall pattern is bullish but quite choppy after the summer. A theoretical low is predicted for mid-August, a high for October, a correction into November and then a rally into year-end. We need to monitor the short-term technical picture into these time periods as they unfold to help confirm whether this type of volatility appears likely to not. We're cross those bridges when we get there, so to speak.

At the moment of this writing, the market has gone against us much as it did after the January 18 'Sell' signal and though we were ultimately vindicated, there was clearly a 'pain' factor. The truth is our most recent 'Sell' signal was issued prematurely based on what is presented herein. A 200-point decline in the Dow Industrials the very next day made me look smart and was triggered by Negative Volume Reversals ™ on June 5. However, the market has rallied back. Taken literally, the 'Sell' should have waited until at least June 25 (according the timeline on the AFM), but that would have put us in an even more disfavorable price position. We have traded under the 50-day moving average four times but only closed under it once in June. In recent days the Nasdaq Composite and Nasdaq 100 (NDX) have posted new bull market highs. The AFM is what it is! It is calling for a correction this summer ideally ending by mid-August. It may be a minor dip or a severe shakeout as amplitude is always difficult to gauge. I am a bit more bearish due to Negative Volume Reversal ™ projections discussed in my daily commetary, a negative bond market and overall bullish complacency focused on the FOMC lowering interest rates. As you know, time is as important as price, in other words, barring some significant technical or fundamental development in the stock market, I cannot remain bearish beyond mid-August as the overall AFM is pointing higher afterwards. The fact the markets have traded higher since June 6 and June 25 does not matter. As I said, this has happened before and I'm sure will happen again. The following comment may sound extraordinary, but years ago I was informed by famous (anonymous herein) source that felt I had tapped into the Federal Reserve System 'Model' or perhaps they were using my 'Model'. Also, this crazy 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. Regardless of whether the current 'Sell' signal pans 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!

10-YEAR TREASURY BOND for 2007:

We've been bearish on Treasuries (lower bonds equals higher interest rates) since mid-December and the AFM for the 10-Year Treasury paints a bearish picture at least until mid-2007. The statements we made in VRTrader.com since mid-December and the forecast herein flies in the face of analyst predictions that lower interest rates lay ahead. Often the 'tail wags the dog' and ultimately the Federal Reserve follows what the bond market has been doing. Think about it! A strong stock market (a leading economic indicator) is telling the economy is robust (not weak) and that higher interest rates are simply a manifestation of greater demand on limited resources which on the surface appears bearish but is truly not. An extreme move in interest rates is a different story, but here we're looking at a gradual increase. The overall pattern for the year shows a slow and steady increase in 'yield', i.e., higher interest rates. The only exception is here in February where the possibility exists for a yield to decline, i.e., lower interest rates - but the move is temporary. Well, I cannot complain about this call! Not only did we see a decline in February, but the overall trend has been higher as forecast. Nothing else much to say, except bravo to the AFM! At the very end of the year, there appears to be another decline coming from higher levels in store denoted by a final 'down bar' on the chart.

THE U.S DOLLAR for 2007:

It only makes sense that higher interest rates and a stronger dollar go hand-in-hand and that's exactly what the AFM for the U.S. Dollar Index indicates. From a contrarian's point of view you have to be bullish on the dollar, as the 'Street' is uniformly bearish. And, we suppose for good cause as the dollar as been in a downtrend for several years. We do not know whether the rally that has been underway for the past several weeks and the rally predicted herein during 2007 is the beginning of a longer more sustainable uptrend or not. It just may be, but for now we're assuming at least until mid-year the dollar continues to show resiliency. From a practical viewpoint, however, should the dollar index break under recent lows, i.e., 82.31 (the December 4, 2006 low), caution should be exercised on the short side. The recent peak of 85.40 from January 12 should be exceeded in the very near future if the AFM is on track. That peak was exceeded on January 26 with a new high of 85.43 posted at that time. Should 82.31 be broken, we will have to consider that the AFM for the dollar is likely inverted. We have speculated that the 87.00 - 92.00 level is a possible target area for such a rally during 2007. 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.

GOLD for 2007:

The pattern depicted below for gold in the first few months of 2007 displays some unusual volatility and we're inclined to wait for further evidence before drawing final conclusions. Taken literally, gold appears to be on the verge of a nosedive here in the first quarter to be followed by a slow an stead recovery until summer. Continued strength in the dollar would traditionally put pressure on gold, so watching the dollar would be important in the days and weeks ahead for a clue regarding gold's direction. Gold itself may indeed still be in a 'twenty-year' bull cycle, but that does not preclude it from experiencing huge swings. Key support for gold lies around first $620 and then $595. Afterwards, downside risk is to $580 and even perhaps $500 which represents a 50% retracement of the $250 to $720 rally from early 2001 to the Spring of 2006. For now, looking at the AFM we're expecting a roller-coaster market short-term, but the overall pattern is bullish for 2007 - so stay tuned. 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. Since then the AFM has forecast a steady uptrend fro 2007. So far, we peaked out April 20 and have declined into late June but still above the March 5 low. Gold has been tracking inversely against the US Dollar (above), so if present patterns continue I would look for an important trading high the third week of October coming off a late August low.

CRUDE OIL for 2007:

The crude oil forecast for 2007 is clearly bearish. We're a bit skeptical, since this market has already experienced a significant decline and appears oversold, but the AFM is the AFM! Those who have followed my commentary over the years know I'm a confirmed conspiracist! I was pounding the table over the existence of the 'Plunge Protection Team' only to be ridiculed and how we know factually it exists. Go ask George Stephanopoulos, former senior political adviser tothe 1992 U.S. presidential campaign of Bill Clinton and later his communications director who discussed its existed openly in an interview several years ago! We knew about as far back as 1987! Currently it is rumored that Saudi princes knew in advance that crude oil prices would go much lower before U.S. oil traders could figure out what is happening. Saudi Arabia may be behind the plunge in crude oil prices playing its part in a game of economic strangulation of the Ayatollah's Iran, who seeks to dominate the Persian Gulf with nuclear weapons. The current U.S. strategy is to starve the Iranian oil and gas industries of new investments, thereby reducing Tehran's revenues and its ability to maintain not only its armed forces, but also the government's social obligations to its people (subsidies, salaries). It is hoped that international isolation and a plunge in oil prices will not only cripple the Iranian economy, but also lead to a regime change. This may what the crude oil chart herein is predicting! At present, no meaningful rally is in the cards for 2007, but the AFM research has not been completed, so stay tuned. The completed AFM shows a high point early in the year, a low during the summer and a strong rally into year-end. I was skeptical of the AFM forecast when I published this report in early February as it appeared to me the market was oversold and the 'Street' had turned bearish. In any event, the AFM itself has been inverted showing a low point here in July, so can we now infer that a top is imminent? Perhaps, so I wouldn't chase oil or oil shares now regardless of the long-term bullish case that likely exists. Fine-tuning the AFM, look for a 'change point' around October 8, i.e., a trading high or low.

Thank you for subscribing to the 2007 AFM. May I extend my very best wishes to you for a happy, healthy and prosperous year

Mark Leibovit,
Chief Market Strategist
VRTrader.com
January 20, 2007, Feburary 5, 2007 and July 9, 2007

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