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Bollinger: "The Sands of Time"

06/24/2005 12:00 am EST


John Bollinger

President and Founder, Bollinger Capital Management

John Bollinger has the rare combination of technical skills and an ability to frame his complex analysis in understandable terms for both novice and experienced investors alike. Here, he offers his latest market overview as well as some of his current investment ideas.

"The stock market is running out of time, not in a singular sense, but in a plural sense. First, the cyclical bull market, which was born in December 2003, is getting long of tooth. We normally think of these affairs running three plus years in secular bull markets and about two years in secular consolidations. (We are just finishing the seventh year of a secular consolidation.) The current bullish phase began either in October 2002 or March 2003; we prefer the March 2003 date, which makes this cyclical bull two-and-a-quarter years old. Second, the cyclical bull is also running out of time in terms of interest rates. We've seen eight increases in rates; the old saw says to be prepared for unpleasantness after just three increases.

"Third, we are also running out of time in terms of valuation; price/earnings ratios are lofty, especially when compared to growth rates. And dividend yields are low, especially when compared to note yields. Fourth, another dimension in which the sands of time are slipping away is seasonality. The best part of the year is behind us and although unpleasantness isn't due until the fall, the easy money is mostly on the table. Fifth, we are also running out of time for the four-year presidential cycle, which tops out for a year in the next quarter.

"Meanwhile, there are plenty of bullish facts. Amongst those keeping the bear's growling to a minimum is that technology and telecom have rotated to the top of the pack. These are normally leading sectors and the end of their long sojourn at the bottom of the list signals a constructive environment. Also bullish is the stock market's absolute refusal to roll over and die in the light of increasing short-term rates, its ability to shrug off bad news, and its refusal to listen to the siren song of intermarket relationships such as rising oil calling it lower.

"Overall, although there are clouds gathering on the horizon suggesting that it is a good time to consider battening down the hatches, the sailing still looks good. There is no real sign of deterioration yet, but given the steady flow of the sands of time we are looking carefully for reasons to consider pulling back our allocation to stocks. An old piece of Wall Street doggerel suggests standing near the door so that when the crowd decides to exit they carry you with them. So, take a close look at those laggard stocks and consider pitching them. If you are leveraged, take an even closer look. Now is not the time to be waiting for time to bail you out.

"The energy market continues to confound those who haven't embraced the idea that demand is out-stripping supply. A huge debate is going on, but it isn't important. Maybe we have reached the peak of global production, maybe it is still in the future. Who cares? What matters is that demand is running in front of supply and that means that the path of least resistance for energy prices is up and the energy stocks look attractive. Already the iShares Energy (IYE ASE), an exchange traded fund, has retraced more than three-quarters of its correction and looks higher from here. As I have repeatedly stressed, the name of the game in the energy market is to accumulate assets on weakness.

"Another area where there seems to be some storm clouds, though these are overhead with no signs of real deterioration, is commodities. In a short-term sense we've seen a bit of a pullback since the middle of March, but that weakness only carried prices back into their first area of support from a longer-term perspective. Try as we might, we look for signs of economic weakness but can't find enough facts to argue against the persistent strength in commodities. The iShares Basic Materials (IYM ASE) has now retraced near half of its correction and just broke out of a base. We regard this as very attractive.

"Something really interesting has been happening to gold. After having been inversely coupled to the dollar for a long time, that coupling has been broken and gold is starting to march to its own drummer. The recent rally in the dollar has been accompanied by strength in gold, not the weakness one might have expected due to the intermediate- to long-term historic relationship. The three gold indices we track, GOX, HUI and XAU, all are doing better than the bullion, another interesting indication of an improving outlook for the precious metal. We recommended the purchase of the streetTRACKS Gold Fund (GLD NYSE) as a core portfolio holding."

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