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Optimism Turns Cautious As Stocks Gain
07/24/2007 12:00 am EST
John Bollinger, president of Bollinger Capital Management, says stocks may run into some seasonal headwinds but he remains impressed by the strength of the rally.
The most important events of the last month were the 300-point up day on July 12th, which was a sign of strength by definition-greater-than-average range, gain, and volume-and the buy signal that occurred in its wake. Together these elements constitute an all-clear signal that should carry us into the middle of August.
Our view on stocks gets dimmer as fall approaches, as we are seeing market breadth, a key element of the rally, drying up as we move into summer. Earnings season has once again proved to be a plus for stocks, with realities exceeding expectations. In any case, on average earnings and economic reports continue to come in better than expected, which is a positive for stocks.
The bottom line is we remain cautiously bullish while acknowledging deteriorating conditions and preparing to batten down the hatches. Cautious and more conservative investors may wish to consider taking some money off the table.
The international markets continue to rally in a concerted manner. I can't recall ever having seen the strength of the momentum numbers we are currently seeing. [But] one of our worries about the stock market in general comes from the international arena, where the FTSE 100, normally a leading indicator, simply cannot make it into new high territory. The trading range is roughly 6,500 to 6,730 and we are smack near the middle, above 6,600. A new high would be a minor all-clear, but the lagging nature of this important sector is a reason for caution.
The bond market has quieted down quite a bit, which may be a major factor in the current rally in stocks. Short-term rates have bounced back and long-term rates have sagged to what looks like short-term equilibrium. There can be no doubt about it; there is a lot of turmoil in the bond market. Perhaps the current quiet is simply shock and awe from the growing subprime debacle. Two of Bear Stearns' hedge funds have collapsed, and we think that is only the tip of the iceberg.
Given all that, the truly remarkable thing is the orderly manner in which the bond market is chewing through the distress. Perhaps it is because this debacle was so widely advertised. Situations such as these can continue for long periods until something acts as a catalyst and the market starts paying attention.
Energy, inflation, the dollar, the consumer, earnings, and China are a few of the things that are on our short list of items that could disrupt this market. Most probably the real culprit isn't yet on that list; it will prove to be some unknown factor. One must constantly exercise vigilance for new factors that interest the market.
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