Key Market Indicator Breaks Out

04/21/2010 2:00 pm EST

Focus: MARKETS

John Bollinger

President and Founder, Bollinger Capital Management

John Bollinger, editor of Capital Growth Letter, says major averages have retraced most of their falls from the 2007 peak, and one in particular signals a rally that has legs.

Anchors are often high points and low points, and frames are often the spans between high points [and] low points. For example, one anchor many investors have at present is the value of their account(s) from the summer of 2007, while another is the value of their account(s) at the March 2009 low.

Together, these anchors form a frame in which some investors are operating. Some sold out near the low and are attached to the lower anchor. A fortunate few sold out near the top and are attached to that anchor. The vast majority are somewhere in between.

Technicians often talk about these in-between levels as retracement levels, with the 50% mark being the oldest and most popular.

Note that all of these indices have exceeded their 50% retracements.

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One problem that many are facing is that they are less invested in the rally than they were during the decline. This could be because they sold during the decline and have reinvested, or because they have lightened up on the way up expecting more trouble, or because new funds have become available, or any number of other reasons—and this is true for individuals and professionals alike.

This means that they are likely looking at rising equity prices with an increasingly desperate feeling of being left behind. We think that this is one of the drivers of the current rally and will remain a major factor for some time to come. This market is simply not making it easy for those who want to, or have to, play catch-up.

Our bullish view into at least mid-year still stands, and we are pondering the potential for additional gains beyond that. The current rally is extremely well confirmed, and we see no signs of a short- or intermediate-term top at present.

Quietly, with virtually no fanfare, the Value Line Arithmetic Average rose to a new all-time high on April 12th. This is quite significant, as we see the VLA as perhaps the most representative US stock-market index.

The VLA is an equal-weighted index of 1,700 mostly US stocks and, as such, it is a very good barometer of the US stock market as a whole. Unlike the Standard & Poor’s 500, which is weighted by company size, or the Dow Jones Industrial Average, which is weighted by stock price, each company in the index has an equal vote.

We view the breakout to a new all-time high as a very strong bullish confirmation of the up trend that echoes confirmations from other broad-market indicators, such as the advance-decline Line, which is trading in new all-time high territory, and new 52-week New York Stock Exchange highs, which hit 587 recently, a very strong number. We continue to think that the up trend has a way to go, both in time and price.

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