Bollinger's iShare Buys

03/19/2004 12:00 am EST

Focus:

John Bollinger

President and Founder, Bollinger Capital Management

"We have come to rely pretty heavily on the iShares exchange traded funds and feel they offer investors really good tools to work with," says technical expert John Bollinger, editor of Capital Growth Letter. Here's his overview of market trends, and his latest iShare buys.

"With the price earnings ratio for the S&P 500 hovering near 30 investors are expecting an awful lot of growth. Just for reference, the long-term normal p/e for the S&P is near 15 and the cheap p/e that value investors hanker for is near seven. The long-term growth rate of S&P 500 earnings is 6.5%, which means that it will take 12 years of normal growth to bring the S&P p/e down to its normal level if stock prices stay put right where they are, or even longer if stocks continue to rally. That's a long time for earnings to play catch up and for the stock market to go sideways, all of which equals a lot of frustration for those who have bet on buy-and-hold investing to pave their way to financial success.

"Meanwhile, the correction is now 5% deep and sentiment has changed dramatically. The bulls are turning into bears by the drove. I frankly can't recall such a fast conversion. In any case we believe that we are in a correction. Small stocks are maintaining their leadership and declining less than their larger brethren. Value remains more attractive than growth and small stocks lead for both value and growth. Our attention remains focused on locating a buying opportunity and selecting what to buy. We currently hold a 70% allocation to US stocks, with a 30% cash position. Here are the latest buy recommendations in our iShares portfolio:

"In January we added positions in the iShares Russell 2000 index (IWM ASE) and the iShares Russell 2000 Value index (IWN ASE). In February, we added a position in the iShares Basic Materials (IYM ASE). This was a classic reentry buy signal in a leading group that had made a complete rotation from first to last and right back to first again in our sector rankings. Further, energy stocks seem ready to go again. And we have added a buy position in iShares Energy (IYE ASE). We saw a small pullback followed by sharp rally that broke out to new highs and now a little sag back toward the breakout point. The action in the related commodities is very constructive, with new highs for March crude oil and unleaded gasoline futures. What really interests me is how rapidly investors and traders came back after these stocks after a top was put in. That certainly seems indicative of strong demand."

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