All Signals Are Go 

08/27/2009 2:00 pm EST

Focus: STOCKS

John Bollinger

President and Founder, Bollinger Capital Management

John Bollinger, editor of Capital Growth Letter, says stocks like Union Pacific and Cisco are poised to lead the next stage of the bull market.

On August 18 we announced a Buy for the major indices. We believe that we are in a cyclical bull market and that pullbacks in interesting stocks should be used to buy them.

Our favorite pattern in this phase is a completed base, a breakout and a pullback to the breakout region. In our view that is a low risk, high reward setup, that is easy to understand, see, and execute. Some examples of these patterns are Monster Worldwide (NYSE: MWW), Vodafone Group (NYSE: VOD), Alcoa (NYSE: AA), Union Pacific (NYSE: UNP), [and] Cisco Systems (Nasdaq: CSCO).

One of the most interesting trends [in our proprietary market group rankings] is the steady advancement of the Transport sector. The other sector with a similar pattern is Business. The interesting thing is that these sectors are about as sensitive to the economic cycle as one can get. So, as has been the case for several months, the story [our rankings] is one of economic recovery.

Still not much in the way of real diversification evident in the international stock markets. Global trends seem to be dominant factors in most markets, with relatively little pricing input from local factors. However, we are starting to see some improvement in the FTSE 100, an index that we regard as quite important. Still, it is quite remarkable how alike the charts of the world's stock markets are; indeed I can't recall a time of greater confluence.

Bonds remain unattractive and should be seen as sources of funds for other investment purposes. We bought some bonds during the meltdown and have started to sell them as we have gotten the best part of the gains from them and the risk reward picture now looks to be skewed toward risk, not reward.

Unlike gold, energy is giving a good indication of where it wants to go, and the way is up. The OSX, the Oil Service Index, is almost at a breakout, just three points from a new high for an index in the mid 70s. We remain quite bullish on the sector and the stocks and advise the purchase of the leading stocks on pullbacks. At present the service, drilling and offshore stocks look best, but we think they'll be coming for the rest of the list as well. There are still some very attractive yields in the sector, which should help the shyer investor get involved.

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