Is the Worst Really Over?

08/20/2008 12:00 am EST

Focus: MARKETS

John Bollinger

President and Founder, Bollinger Capital Management

John Bollinger, editor of Capital Growth Letter, thinks we may have seen major lows in US stocks and the dollar.

An important stock market bottom was recorded on July 15th, and that bottom was a very painful and sloppy retest of the January and March lows. We are now in a recovery mode.

Of real interest is that while the large-cap indices violated their winter/spring lows, the small-cap indices did not; they held support. We think that the short-term trend is up and that the intermediate-term trend is probably up as well.

Certainly the environment is conducive to a rally. Interest rates are low and money supply is very accommodative. Investment advisor sentiment, as measured by Investors Intelligence, fell to its lowest level since 1994.

The raw number of bullish advisors bullish fell to 27.4%, versus the 28.4% recorded at the 2002 lows. So, although this decline has been much [shorter and] less severe than the 2000-2002 decline, we have actually done more psychological damage.

Your focus ought to be on smaller stocks and growth. Do not let a resurgence in the financials distort the picture. A resurgence in the financials makes value seem to outperform growth. However, this is one of those times when growth steadily outperforms value.

You could never have convinced me that $112 crude oil would bring a sense of relief, yet the $35 decline that ushered in the recent $112 point has eased fears of the damage a runaway energy market might cause. We continue to [believe] that we are in an environment conducive to higher energy and energy stock prices. Pullbacks such as the one we have just seen should be used as opportunities to acquire assets at attractive prices to be held for the long haul.

Gold, which looked like it was crossing the $1,000 barrier, got knocked for a loop, down 20% in three weeks. At the same time, [gold] stocks got pounded down by a third on average, with more substantial losses for some. We think that this has created a long-term opportunity to buy gold, precious metals, basic materials, and natural resource stocks.

We continue to think that the emphasis of investors ought to be on the US markets. The dollar is in recovery mode, which makes US assets perform better for US investors. However, the dollar is still cheap on an historical basis, so US assets seem cheap to foreign entities, and capital flows are still heading our way. We don't expect this basic pattern to change any time soon, so if the international allocation were anything more than 10%, which we see as a minimum for diversification purposes, we'd whack it back to 10%.

It is possible, just possible, that we have seen a major low in the dollar. The euro's high $1.50s trading range against the dollar broke down, and we are now pulling into the first logical area of support, $1.45 to $1.50.  More on this as events develop.

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