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Stocks Stuck on a Wall of Worry

07/28/2011 9:30 am EST


John Bollinger

President and Founder, Bollinger Capital Management

The stock market continues to fare well despite the worries being foisted upon it from many different quarters, writes John Bollinger of Capital Growth Letter.

Between the European debt crisis and the Washington debt crisis, who knows what to think?

However, the result is clear—all this bad news can’t really drive stocks lower. We did see a proper, almost 10%, correction for stocks in general, yet we find ourselves at the upper end of the trading range within easy shooting distance of new recovery highs.

One important characteristic of the trading range that has prevailed since February is the rotation within it, which can be seen at all levels; stocks, groups, sectors, size, growth versus value. It is as if portfolio managers are constantly trying to find the key to the lock, but not having much success.

The reason is that the news is keeping a lid on the market, so really all one can do to try and get ahead is to try to make group, sector, stock, style, and size bets in areas where things are working, using areas where things aren’t working as a source of funds.

Stock market internals remain in good shape with no real signs of deterioration. The normal fear would be for distribution to occur in an extended trading range like the one that has prevailed since February. However there is little sign of that.

The advance-decline line looks set to make a new high in advance of prices, and though there is evidence of rotation, there are few areas where the damage is great.

A study I did some years ago, which no doubt needs to be updated, points to the idea of the annual decline; that is the single annual decline. Years in which there is more than one significant decline are rare as hen’s teeth.

Using a filter of 10%, many years have no annual decline, but some years like 1982 and 2007 have two. In bear-market years like 2000 through 2003 and 1973 and 1974, it is very hard to count the declines because the primary trend is down, and I suppose we should be counting advances instead, as they are the counter-trend moves.

However, we are at present in a cyclical advance within a secular consolidation, so the best model might be 1966 to 1982, when single annual declines were the rule except in downtrends, which are again hard to count.

I say this as it feels to me like we have seen the decline for the year, and the fears that we hear regarding a fall slaughter are not likely to be realized.

1,330 seems to have some sort of special significance for the S&P 500.

Since we first recovered that level on February 11, we have crossed it to the downside four times on high-momentum, wide range days: February 22, March 1, June 1, and July 11, and recently we crossed it to the upside on two high-momentum, wide range days: July 1 and 21.

It is almost as if some really big players were using an algorithm that anchored on the idea of aggressively adding exposure above 1,300 and aggressively reducing it below that level. I’m not at all sure what this means, but as 1,300 lies both just below current prices and within 20 or 30 points of the break zone, it bears monitoring.

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