Positive on the Markets

11/27/2007 12:00 am EST

Focus: MARKETS

John Bollinger

President and Founder, Bollinger Capital Management

John Bollinger, editor of Capital Growth Letter, dissects the US and international markets, with a positive bent…

Looking back, we can see that we have shifted into a new volatility regime and we expect that this higher volatility is here for some time to come. We entered the year with the VIX, the CBOE's volatility Index, at 10, and few could imagine it being anything else. In March, the VIX rose to 20, but then it did not fall all the way back to where it started. Rather, it pulled back to 12 and then started marching steadily higher, eventually peaking at over 37 in August. Now in the wake of the August correction, as the market tries to march into new high territory, the VIX bottomed near 17 and has turned higher again.

While early in the year, the name of the game was to buy volatility, now it is to sell volatility as opportunities present themselves. The basic law of the market is that high volatility begets low volatility and vice versa. It is not that people don't know this, it is that they simply cannot imagine how we will get to the other side of the equation; but we do, time and again we cycle back. For the time being it is not clear that we have reversed the volatility cycle. However there is a reversal pattern in place and the path of least resistance is toward a lower volatility environment.

The top sector in the GroupPower ranking is International, followed by Energy, which is making a new high. Next comes Basic Material and then Technology. After the NASDAQ Composite, which is next, comes Telecomm, Industry, and Health and that completes the top half of the list. All told that is a pretty positive picture.

Our favorite leading indicator for the US stock market is the FTSE 100. It led on the downside into the lows and is now in recovery mode with the relative-strength line versus the S&P having turned up. Another interesting Euroland market is the German market, the DAX, which had been the Euroland relative-strength leader and is moving to reassume that mantle post correction. Next door to the west, French stocks had been market performers, but have now shifted to laggards.

In India, stocks have been simply rocketing higher. The authorities stepped in to cool the madness and an instant 9% came out of the market, followed by a wild ride. We'll have to wait and see what happens, but this is clearly one of the ‘speculative indicators’ that Ed Hart used to talk about and is well worth monitoring closely. You can have a look at http://in.finance.yahoo.com.

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