Stocks Mark Time for Next Big Move

01/03/2008 12:00 am EST


John Bollinger

President and Founder, Bollinger Capital Management

John Bollinger, editor of Capital Growth Letter, says uncertainty is paralyzing money managers, but he thinks the economy will muddle through and stocks will go higher.


The stock market has gone nowhere since the end of January [2007], flat for almost a full year. January 31, 2007 found the Standard & Poor’s 500 at 1438.24 and we closed Wednesday at 1447.16, a mere nine points or a bit more than half a percent in eleven months and the reason is absolutely clear: uncertainty.

Years ago an options advisor by the name of Roy Blumberg—later seen as a market commentator on CNBC—first suggested the idea that portfolio managers sit on their hands when they are uncertain and act, positively or negatively, only when they reach consensus.

The problem is that under conditions of uncertainty, where a consensus view does not prevail, portfolio managers cease activity, and when portfolio managers are not purchasing securities the market will go down by itself. This is because there are steady liquidation demands to pay the bills, for mandatory disbursements, to send Joey off to school, to buy the new house and so forth.

The bottom line is that people are constantly pulling money out of the market, so in times of uncertainty, when asset managers sit on their hands, prices will work their way lower.

So, which way will the uncertainty be resolved—Recession or not? We think not. We know that groupthink is completely in recession mode, but “muddle through” seems far more likely to us. For example, the stores near us are all seeing strong traffic and even the traffic in the streets is heavy. So, we think that the uncertainty will be resolved and prices will list as underinvested portfolio managers strive to play catch up.

World markets continue to offer better opportunities than US markets and I am acknowledging that by boosting our international allocation five percentage points to 25%. We'd like to spread this with a bit more emphasis on Europe than Asia—maybe 15% Europe and 10% Asia.

One reason we like Europe is their increasingly strong response to the potential for a credit crunch. At a 500-billion euro—that's billion with a ”b”—loan package to the banking system, it is clear that the [European central bankers] get it and are ready and willing to act.

Another is the performance of our favorite Continental leading indicator, the DAX, which has been steadily gaining strength against the S&P 500.

We will commit another five percentage points to the US on our next buy signal, which will take us to 90% invested and 10% cash.

The US commitment should be primarily to stocks at or near their yearly lows with sound prospects. We know that putting money to work in times of adversity is tough, but it is the right thing to do in our view, especially when there is reason that the consensus view is wrong.

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