Yes, We Hit Bottom, So What's Next?

04/21/2009 11:02 am EST


John Bollinger

President and Founder, Bollinger Capital Management

John Bollinger, editor of Capital Growth Letter, says the market made a bottom in March, but it's still unclear what kind of bull market we're in now.

The question that is on many investors' minds is whether the 2009 lows were low enough to support the notion of a market bottom and the notion of a subsequent bull market, cyclical or secular. In other words, was real value created, the kind of value that can sustain a bull market? We think the answer is yes.

For many years we have believed that we are in a long-term consolidation that began in the middle of 1998 and that will likely carry into the next decade-2014 plus or minus a few years is sort of a fuzzy target date for the end of this phase. The best analogue for this period is the mid-1960s through the early 1980s—a period in which the market went sideways while experiencing a number of cyclical bear and bull cycles.

Within that context, I believe that we have transitioned from a cyclical bear market into the early stages of a bull market. The overarching question is whether this is to be a cyclical or a secular bull market. If it is a secular bull market, then we can expect a run like the 1950s-1960s or 1980s-1990s, roughly a ten-power increase in the averages.

If it is a cyclical bull market, then we can expect a run like the cyclical bulls of 1966-1968 or 1970-1972 or 1974-1976—in short, a return to the immediately prior highs, a run of 50% to 100%. There seems to be little purpose to questioning whether we have a bottom in place; the answer seems so obviously yes.

Yet there are few believers in the staying power of the current rally; fewer still believe a return to the old highs is in the cards, and you can forget about anybody even having the wildest hope of a classic secular bull market emerging from this rubble.

It is my view, and I believe that the evidence clearly supports the idea, that we have established a major bottom in the stock market, that this bottom has been retested, and that we are in a rally phase. If one takes the period 1966 to 1982 as a very rough analogue, then we have just been through the 1973-1974 bear market. It seems so obvious to me that the 1960s through the 1980s is a near-perfect analogue for the current market environment.

It would seem that the part about driving out the excesses and preparing the way for the next phase has been forgotten about, yet that is exactly what is happening. In any case, the odds that history suggests are a return to the prior highs driven by a rally that lasts between one and two years. (Please do note that we are not the Japan of two decades ago; the differences are many.) And it is those odds that we intend to play.

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