Buying Stocks, Selling ETFs

10/21/2008 11:00 am EST

Focus: ETFS

John Bollinger

President and Founder, Bollinger Capital Management

John Bollinger, editor of Capital Growth Letter, says he’s changed his strategy and now focuses on individual stocks.

The panic that enveloped the markets peaked on October 10th with a reversal day ranging 1,019 points [in the Dow Jones Industrial Average] and a VIX [volatility] reading of almost 77.

The records and extremes accompanying the October 10th are the stuff of legends and the stuff that long-term bottoms are made of: record or near-record ranges, gains and losses, advances, declines, volumes, and volatility. We won't repeat them here as they have already been reported endlessly in the press; the idea is the climatic nature of the event, which I think is clear.

[In a recent hotline,] we announced a change in strategy to suit the changing circumstances. Over the past few years our focus has increasingly been on exchange traded funds (ETFs), as that is where the advantage seemed to lie. However, given opportunities created by damage in the markets, we have decided to turn back to our roots and focus more on individual stocks.

In many areas more damage has been inflicted on individual stocks than is apparent in the averages. While the averages may be off a third from their highs, many stocks are off two-thirds or more.

Our first set of steps toward this new strategy were announced [two weeks ago with] the sale of two ETFs, iShares Dow Jones US Basic Materials (NYSEArca: IYM) and iShares Dow Jones US Energy (NYSEArca: IYE), and the purchase of two common stocks, Apple (Nasdaq: AAPL) and BankAmerica (NYSE: BAC).

The second set of steps, announced [last week], was the sale of mid-cap ETFs and the purchase of General Electric (NYSE: GE) and ING (NYSE: ING). We now recommend the sale of large-cap and mid-cap growth ETFs and the purchase of Potash (NYSE: POT) and Chesapeake Energy (NYSE: CHK). We plan to continue this process as opportunities present themselves.

We are still long-term bullish on energy stocks and are frankly a bit surprised that the price of oil was cut in half from its peak value. We recommended trimming back energy positions in the wake of the peak, but we never envisioned this sort of rout. Here, as in the stock market in general, we see long-term value being created of the sort we didn't think possible just a few months ago.

Commodity prices have fallen back to their mid-winter 2007-2008 levels. We expect that this area will prove to be support and eventually a staging area for a rally in commodity prices as fear of global recession ebbs. However, there is no sign of a bottom being in place yet.

Our outlook for the dollar is positive; this month we broke the up trend line from 2001-2002 for the euro. A fly in the ointment is the yen, which has strengthened against the dollar. Indeed, it is looking more and more like a market of currencies, not a currency market, which means opportunity for the forex trader. 

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