Have US Markets Hit Bottom?

07/23/2008 12:00 am EST

Focus: MARKETS

John Bollinger

President and Founder, Bollinger Capital Management

John Bollinger, editor of Capital Growth Letter, says US stocks may have reached their lows, and he’s shifting some money from foreign markets into domestic equities.

Time to face the music: I missed the recent stock-market decline. I just didn't see it coming. The path of least resistance seemed up, but the rot in the financial system simply overcame the seasonal strength. It is unbelievable that so many in the finance industry could be so stupid… 'Nuff said.

I could be wrong about this, but it sure seems like Wells Fargo’s [earnings report] put a bottom in the stock market. The averages rose by 2.5% to 3.5% and the financials rose by more than 10%. This rally came against a backdrop of a deeply oversold market.

One example of the negative sentiment prevailing is the Investors Intelligencesurvey of market letters in which net bulls fell to a 14-year low. Another example comes from our persistence work. As initially pointed out by Rob Hanna on July 3rd, several of the bank and financial ETFs had traded below their ten-day averages for 41 days in a row. That number ultimately grew to be 48.

A quick scan of the European markets shows them undercutting their January and March lows. This suggests tough going through a lot of resistance on the way back up. In the US, both the mid-cap Standard & Poor’s 400 and the small-cap S&P 600 held their January/March lows and are much better positioned to rally from here than any of the Euroland markets—or the S&P 500, for that matter.

Our portfolio focus is primarily on the US, while we maintain a small international commitment for a bit of diversification. In line with that thinking, we are reducing our international allocation to 10% in favor of US stocks, which will [eventually] rise to 65%. We believe that we have seen the bottom in the US stock market, so as the rally gets going and we get a bit of confirmation, we may adjust the allocations to suit the emerging trends.

Barring that, we'll most likely go to 70% US stocks, 10% international, 10% gold, and 10% cash allocations and stay there into the election season. We believe that bonds are entering a long bear market that will be driven by inflation.

We repeat our advice about the energy markets: take some profits and see how things develop. It looks like the back of the advance in crude has been broken and that we are in for a correction at minimum. Frankly, energy prices got so far ahead of themselves it is really hard to assess the probabilities going forward. So, let's Take some money off the table and sit back and wait for the picture to clear up.

Subscribe to Capital Growth Letter here…

Related Articles on MARKETS