Steady As She Goes for Stocks

04/30/2007 12:00 am EST

Focus:

John Bollinger

President and Founder, Bollinger Capital Management

John Bollinger, president of Bollinger Capital Management and editor of Capital Growth Letter, says stocks look very good for the near term, and so do commodities, and advises staying fully invested.   

We remain constructive on the US stock market. Stock market breadth has been very good. The recent decline was over quickly and was met by solid purchasing interest in stocks. Net new highs dipped into negative territory on only two days, and have since been running highly positive. Up volume has been more than 90% of volume on two days, a pairing with an excellent forecasting record for higher prices over the next three, six, and 12 months.

Energy and basic materials are the number one and two sectors in our GroupPower ranking. That is a pretty good picture of an economic expansion, but the number three and four sectors are health and consumer noncyclical, which suggests that people don't believe in the expansion.

We think that the sub-prime debacle is overdone and that investors ought to turn their attention elsewhere; the news has already been priced in and the actual debacle is less than hoped for in some quarters. We find it particularly ironic that those who complained the loudest about limited access to credit and then got credit in the form of sub-prime loans are now complaining loudly about having gotten credit. 

Intermediate- and long-term interest rates are simply not high enough to be attractive given the current high level of inflation.

In a very interesting development, gold is trading almost tick-for-tick with US stocks this year. The fit is very strong on both the up side and the down side. From a slightly longer perspective, the relative strength of gold versus the S&P 500 is flat since September of last year. This is really quite remarkable when you consider the supposed lack of correlation of these two markets.

Once again we counsel caution as to the "benefits" of diversification when it comes to sharp contractions in value. In the last several serious declines that we have seen, many portfolios behaved as if they contained but a single asset. We wonder if the burgeoning hedge fund market isn't systematically welding the returns of investable assets together, especially in times of strife.

The commodity market is still strong. Our Commodity Composite just made another new high. This is a clear-as-a-bell argument that the world's economies are strong, that demand for basic materials is high and that a recession is not in the immediate cards. The basic materials stocks can be bought on any weakness. We do not feel that the case is as strong as that for the energy stocks, but it is strong nonetheless.

Our current allocations stand at 60% US stocks, 20% international, and 20% cash. We expect that the next change in our allocation will be in favor of cash as the cycle gets longer of tooth, divergences creep in, and market conditions deteriorate. For now, it is "steady as she goes."

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