North American markets are nearing a cycle top

Strangely, many traders thought last week was a good one, but except for a few big cap big winners (PFE, MRK, MO, HON, HD and UTX) the week was actually a flat to down broad market in the U.S. The transitioning from bull to bear continues.

A serious issue for all equity traders is that the U.S. treasury yield curve is inverting. The three-year Treasury Note is now yielding less than the two-year, and is flat with the five-year yield.

Historically, that condition has always been a precursor to a significant decline in equity prices. And in terms of recent history, the last two bear markets in U.S. equities bottomed October 8, 1998 and October 10, 2002. So going into 2006 in two weeks, this bull market is rather long-in-the-tooth, as cycle traders like to say.

They are of course referring to the traditional equity market four-year Kitchin Cycle that is linked to business cycles in the global economy.

As I have previously said, my thinking is that the longer this bull runs, the more baggage it will carry on its back, and the faster and further it will tumble - like October 1987, which had enjoyed a bull run from the previous low of August 1982.

I believe that cash available to come into equities at this point (see RYDEX) is near gone.

To protect my wealth, I went to 78-pct in cash or near-cash during this quarter. I hold 12-pct in gold and silver stocks (a major over-weighting) plus a minor-over-weighting in energy, industrials and gas pipeline utilities. I am short Financials and under-weighted in Telecom Services.

A 2-pct holding in gold and silver miner call options was closed two weeks ago and moved into the underlyings, which are not so leveraged, because I could see that the bulls had over-bought the metals market. The other ten pct of allocated assets is spread across all other (non basic material) sectors except Financials, and Telecom Services, where I have none except shorts (XLF and IYF).

According to %K Stochastics on the Hourly data for the broad equity indexes, which were pulled down to zero to ~15 at the Friday close, I opined in my Saturday blog that there would likely be a pop to the upside on Monday morning. And the Dow has just now opened up +10 points to 10883.

But as I wrote on Saturday: "That excitement will be followed by extreme hype from the CNBC talking heads and guests in their new show format, which, like their neighborhood gang member Howard Stern, starts on Monday. Madison Avenue spinmeisters will be working full-time to kick this off, which will suck the last available dollars into the market.

So what happened last week to U.S. Equities? The Naz closed down -0.2 pct W/W and Russell small caps were down -0.8 pct, while about six Dow stocks only (the ones mentioned at the top) combined to push up the Dow and S&P 500 to modest gain. Eighteen Dow stocks closed up on the week, but Friday only about 10 of the 30 held up.

Canada's TSX index was off about -0.2 pct W/W, but did gain strength on Friday as 75 high-quality income trusts were added to the TSX index (at least with a half-weighting at this point, with the remainder to come soon, which is an effort to maintain stable markets).

Among the broad based U.S. Sector ETFs I monitor: Seven were up; 3 down last week. Except for Friday, it could have been 10/10 up, which is bad for somebody who is largely in cash, like me.

But not to worry; by late this week, I think you'll be seeing the bearish patterns of falling pennants as stocks continue to get distributed to suckers who have been conditioned like Pavlov's Dogs by Wall Street and Big Media.

Here's what happened last week to the U.S. sector ETF's, and how I see it, anyway.

• Energy (XLE): Over-weighted: winter ahead; week's worst performer
• Basic Materials (XLB): Over-weighted: metals will recover; 2nd worst performer
• Industrials (XLI): Market-weighted: good week; up +0.6 pct (HON, UTX, BA)
• Cons. Discretionary (XLY): Market-weighted: consumers have no tickee
• Cons. Staples (XLP): Market-weighted: consumers must like smoking; MO >7pct
• Healthcare (IYZ): Market-weighted: ignoring Big Pharma troubles; PFE +9.5 pct
• Financial (XLF): Under-weighted: flat week; big earnings for banks
• Technology (SMH chips): Market-weighted: flat week; bad signs on Fri.
• Telecom Services (IYZ): Under-weighted: week's loss taken entirely Fri.
• Utilities (XLU): Market-weighted: #3 weekly performer

Bonds: Modest gain, with confused trading; one good move all week. But I think the bond market bear is starting to go to sleep for the winter. Bonds are taking on a better look.

Commodities: Last week the CRB index was moderately down to 326.36 (-0.44 pct W/W) on oil and precious metal price declines. Commodity prices are likely to peak soon, which will coincide with gradually improving prices in the U.S. bond market.

Oil & Gas: There was a modest loss on the week, after big day Tuesday. Spot NY Crude closed down about -0.6 pct W/W to $58.06.

Gold: Gold was down sharply like all the precious metals, starting from Monday and reaching a bottom on Wednesday. The gold bulls are trying to hold the $500 psychological level, which appears to be holding. Metal prices were higher this morning, with gold up +$5.70 and platinum up +$16, earlier. Basically the gold story last week was all about the Tokyo commodities Exchange doubling the margin requirements on gold. Today they reversed their stand, so the metals are rallying again.

Goldminers: Shares of North American miners made major high last Monday and sold down till Wednesday, then traded strongly higher into the close on Friday. So the stocks last week turned relatively much stronger than the metal, which typically happens when the gold bull starts to run.

Forex: The euro-bear definitely hibernated, and USD bear is growling in major forex moves. Last week the trade-weighted USD was down -1.70 pct W/W to 89.71. The Euro priced in USD strengthened by +1.50 pct W/W to 120.01. More to come, I think.

So, all in all, I see that the final thrust to the year-end rally is underway. Whether it ends in December or January is a guess. But I have positioned myself for the buyer's market that I foresee in the months ahead.