Don't Worry—the Market's Strong

07/21/2009 11:00 am EST

Focus: MARKETS

John Bollinger

President and Founder, Bollinger Capital Management

John Bollinger, editor of Capital Growth Letter, sees all the signs of a new bull market, but worries that almost all asset classes are moving in the same direction.

A couple of days ago I heard talk of a double-dip recession. It seems a bit early as there is no real evidence that the current recession has ended, or even ebbed, other than that stock prices have stopped going down. To me, this is evidence of just how deeply ingrained bearishness has become, and that is a real problem for the economy.

For example, the recent correction to the March / June rally ran mostly sideways and took back about 25% of the rally gains for the averages. In other words, it was a garden-variety correction. Yet, it felt like a resumption of the bear market to many.

Clearly we are not out of the woods and risks abound, but talk of a double-dip recession seems a bit premature. Slowly but surely the evidence that we are in an emerging bull market is mounting. We reported earlier on a buy signal from the Coppock Guide, and there are lots more:

  • [Technician Michael] Zahorchak's key 40-week moving average is set to turn up, as is the 200-day, a very widely followed trend indicator.
  • Interest rates are low.
  • The yield curve is steep.
  • Sentiment is certainly at levels that support bullishness from a contrarian point of view.
  • Government spending is growing.
  • There are many classic bullish divergences, of which the McClellan Oscillator, New Highs and Lows, are good examples.
  • Participation is broad.
  • Stocks are going up more than they are going down.
  • Many issues are completing bases and breaking out.
  • Sector / group leadership is good.
  • Rotation is normal.

While the risks are clear, we think we are in a cyclical bull market that will carry us back into the region of the old highs.

[Meanwhile,] commodity prices have pulled back in sync with the correction in the stock market. The peak in our commodity composite was on June 12th, and a bit more than a third of the rally has been given back. This seems like fairly normal price behavior, and we are not overly concerned at the moment.

However, there is something to be concerned about: Virtually all of the world's markets are trading together—industrial commodities, gold, freight rates, oil, US stocks, world stocks, etc. Asset prices seem correlated to an extraordinary degree. Thus, the benefits of diversification seem scant.

[But] there really isn't much to recommend bonds. Low yields are not competitive with potentially high equity returns, inflation looms ahead, and what value there was in this market has been largely erased by the monstrous rallies in corporates and high yield.

One place where there does seem to be some value left is preferred stocks. Perhaps this is because they are relatively illiquid and the market lacks efficiency in this area. So, if income is a need for you, preferreds are a place to look.

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