The Glass Is Half Full

04/23/2008 12:00 am EST


John Bollinger

President and Founder, Bollinger Capital Management

John Bollinger, editor of Capital Growth Letter, says there’s too much doom and gloom about the markets, and there are even some favorable signs that are easy to overlook.

The gloomers are hard to refute, as no matter what you say they have some ground to stand on—however shaky.

For example, we are in the midst of an international financial crisis, the peak growth rates for the US are probably behind us, there are a lot of derivatives outstanding, internal and external debt is growing, savings rates could be better, manufacturing is declining, we are at the center of the world's financial system, and so on.

Of course the counter arguments get little play: Bad news is always more interesting than good news. For example, we are successfully dealing with the financial crisis, growth rates remain adequate and may increase, debt levels when viewed on a relative basis aren't extreme, saving is going on in many non-measured ways, tomorrow's industries—services, entertainment, software, technology—are growing strongly, the world's financial system is becoming increasingly diversified, and so on.

What this reduces to is the iconic glass. So, is it half full or half empty? We think that more is going right than going wrong, so in our view the glass is half full. If ever a financial crisis threatened the system, it was this winter, and we now find ourselves in the recovery ward, not the graveyard.

Net new highs, the number of stocks making new 52-week highs less the number of stocks making new 52-week lows, often gives a good feel for the basic trend of the market. A couple of things strike us about this series. First, as the market made new lows in March, net new highs didn't even come close to equaling their January lows; this is a classic positive divergence. Second, we are running about neutral at present, tipping into positive territory, which is about what we'd expect after a correction and a bounce.

We think that the salient feature of this market was the extremely low sentiment readings recorded a month back. This is best illustrated by the ISE options index, which tracks opening option positions. Even today, these numbers are hovering around 100, indicating virtually no interest in making bets on the upside even on the strong up days—credulity is low, a bullish fact.

Another aspect of the sentiment picture is the Investors Intelligence survey. We look at net bulls, bullish advisors less bearish advisors, [and] this indicator fell to levels associated with the 2000 and 1998 bottoms, another bullish fact.

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