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Cautious on Stocks and Gold

01/28/2010 12:00 pm EST


John Bollinger

President and Founder, Bollinger Capital Management

John Bollinger, editor of Capital Growth Letter, says stocks worldwide are in a correction while gold may have entered a bear market.

The world's markets are pretty much in sync with the US market, with one notable exception. Hong Kong is the most advanced in the correction process and is testing the first important support level. If we are to see a full stock market correction at this time, we'd expect all of the world's stock markets to test at least the first line of support.

In the old days, we thought of these sorts of corrections as running seven to ten percent and taking months. Nowadays, corrections seem to be faster and more violent than ever before.

We take this to be derived from two factors, perhaps related. One: the short-term orientation that dominates today and prevents many players from "weathering" anything. Two, leverage: As we saw last year, de-leveraging can produce a fierce bear market and it would seem foolish to imagine that the same phenomenon is not at work on the micro level.

[Meanwhile,] gold and the gold stocks are on the verge of entering a bear market. I know that seems like an incredible conclusion, but it also seems hard to avoid. The bullion peaked at $1,225 [an ounce], fell to $1,075 and recovered to $1,163.

The last two points form a frame of reference for deciding the outcome: break $1,163 and the game is on again or break $1,075 and you're in a bear market by definition—i.e., lower lows. The problem is that gold stocks have already broken down.

It doesn't seem right that gold should be entering a bear market, but maybe these days gold is simply the inverse of the dollar, which is strengthening.

The Dollar Index is in the last stages of polishing off a classic chart formation. It built a base, rallied, pulled back to the breakout point, and has now turned higher. 78.5, which is where it [closed Wednesday], is exactly the breakout point to complete the pattern.

These patterns have growth potential usually defined as the height of the base, which in this case is four-and-a-half points, or about 83. I know that after such a long drubbing, upside counts are uncomfortable at best, but there you are: 83.

We remain bullish on the energy sector, which we think will offer nice gains over the coming years. Our basic strategy is to buy energy assets on pullbacks to hold for the long haul. Our view is that consumption has outstripped production and prices are in a long-term up trend. We do anticipate substantial volatility and would use pull backs as buying opportunities and peaks as hedging opportunities to manage the holdings.

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