Markets Give Strong Buy Signal

09/25/2007 12:00 am EST

Focus: MARKETS

John Bollinger

President and Founder, Bollinger Capital Management

John Bollinger, editor of Capital Growth Letter, says the Fed’s easing and some key technical indicators point to a continued rally in stocks and commodities.

On Tuesday September 18th the Federal Reserve cut interest rates and the stock market rallied by 300 Dow points, turning in the largest percentage gain in several years. At the end of the day, 96.5% of total New York Stock Exchange volume and 90.3% of NASDAQ volume was up volume.

Those are impressively bullish figures. This [was] the third better-than-90%-up volume day for the NYSE since the August 15th low. At least for now, the bulls are in control with the full backing of the monetary establishment.

We have long watched the VIX as a source of market-timing information. The VIX as we know it today is an index of the implied volatilities derived from options traded on the Standard & Poor’s 500.

The most important VIX system buy signal came on August 17th and was immediately confirmed. Less important buy signals, also confirmed, came on August 28th and September 10th.

Large-cap blend, like the Standard & Poor’s 500 or NASDAQ 100, is attractive and small-cap growth is also attractive. That makes sense: large cap got hammered, so it is a recovery play and small-cap growth can justify the valuations. [Meanwhile,] world markets continue to do better than the US, as it is in large part the world's economy that is the dominant factor.

Clearly inflationary pressure will scale up as a result of the easing we are seeing and gold can do well in such an environment. However, if you wait until the inflation has shown up, you’ll be late to the party.

We continue to think that the demand curve has crossed up through the supply curve for energy and will remain that way barring a severe recession or a stunning technological innovation. In any case, the markets are giving us a clear signal via oil prices that some unknown disruptions are likely in the cards. Energy stocks remain attractive and can be bought on pullbacks.

If the economy were in real trouble we'd expect to see some evidence of it in commodity prices, but we see none at present. Our Commodity Composite just powered on up to a new high. That's right, a new high, not a recovery high or a swing high, but a new high. We regard this as an all-clear signal for the economy. [And although] the dollar has fallen, commodities have risen much more.

Prices in Euroland seen from the perspective of the dollar seem astronomical. In the opposite direction, prices in Japan, which always seemed astronomical in the past, now seen normal. Typically extremes such as these have led to big reversals, but there is no sign of such a reversal at present, as the dollar made new lows in the wake of the Fed's easing. 

We remain at 60% US stocks, 20% international stocks, and 20% cash.

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