Bollinger's Top ETFs For Technical Analysis

Famous technician describes how ETFs work in his analysis.

sumit
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Senior ETF Analyst
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Reviewed by: Sumit Roy
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Edited by: Sumit Roy

John Bollinger, CFA, CMT, is president and founder of Bollinger Capital Management, an investment management company that provides technically driven money management services. Regarded as one of the foremost market technicians, he is perhaps best-known to the public as the creator of Bollinger Bands, which he developed in the mid-80s.

The bands are featured on most financial charting software and websites. ETF.com recently caught up with Bollinger for his views on technical analysis and the latest developments in the financial markets.

ETF.com: For those who don't know, would you briefly tell us what technical analysis is?

John Bollinger: Well, you can divide the world of analysis roughly into two major pieces—perhaps four, but we'll get into that in a minute—technical analysis and fundamental analysis. The fundamental analyst studies the books of a company, the economy, competition, market penetration and other factors that have to do with the fundamental quality of the company's business. From those numbers, he creates a valuation.


Say the valuation is $40 a share. He then goes into the marketplace and compares that to the market price. If he believes that the stock is worth $40 and it’s trading at $50, he'll either postpone purchase or perhaps he'll actually short if he's convinced the stock is sufficiently overvalued. On the other hand, if the stock is trading at $30, he may recommend the purchase because he believes it's 25 percent undervalued, according to his work.

Essentially, the fundamental analyst believes he can value the stock correctly and that the market may be wrong.

Technical analysis takes exactly the opposite approach. The technical analyst believes that virtually all information that's available is correctly impounded into the price of a stock; therefore, studying the price history of a stock is in fact the best way to study what's going on with that company. To a technician, if a stock is rising, that indicates a positive outlook for the company. If the stock is falling, that indicates a negative outlook for the company.

There's another factor worth considering in that the technician believes prices can and do go to extremes, where they no longer make any sense. But the technician measures that in relation to past price history.

For example, if something is too far underneath its 50-day moving average in comparison to the way it's behaved in the past, the technician may believe the stock is oversold and ready to bounce. Or if the stock is too far above its average, he may believe it's gotten ahead of itself and is ready for a pullback. That's sort of a mean-reversion approach.

Those are the two main schools of technical analysis: trend following—if it's rising we expect it to continue rising, and if it's falling, we expect it to continue falling—and mean reversion.

That said, in the past few decades there's been some changes. A large portion of what was once technical analysis is now practiced by people calling themselves quantitative analysts and behavioral analysts.

So you really have four schools of analysis today: technical, quantitative, behavioral and fundamental. There are significant overlaps in the disciplines, but they're basically four categorizations of the approach of the analyst to the market.

ETF.com: What types of securities do you use technical analysis on? Do you look at ETFs at all?

Bollinger: I certainly do look at ETFs. But technical analysis can be done on almost anything. In our own practice, we look at stocks. We look at ETFs. We look at futures. We look at indexes. And we look at commodities. All of these seem to work quite well with technical analysis.

ETF.com: Do you have any thoughts on the hot sectors of the year, like health care, Japan and Europe? Are these areas to stick with?

Bollinger: It's not so much that they're areas to stick with as it is the idea that we're in a rotational market. Especially for people who are interested in ETFs, this is about the finest set of opportunities you get, because basically one set of groups, one set of market sectors, one set of macro areas will be going up, and another set will be going down.

For somebody who's following price action in these markets, this is a great opportunity. These ETFs give you really interesting ways of being able to invest in sectors that we didn't have before.

If you go back some years, all we had were a few mutual fund families that would allow very limited trading in some sector funds. But now we have these ETFs that are modeled on various indices that give you opportunities to play all these sector and different segments of the market.

ETF.com: Which ETFs do you like to trade?

Bollinger: Much of my history has been involved with the idea of volatility. I’ve been thinking about volatility from the time I entered this business because I was an options trader. To be an options trader, you have to have a good handle on volatility.

So I'm very fond of all of the volatility ETFs. I follow them carefully. I use them as hedges and as market surrogates. And I quite like to trade them.

I’m also very much interested in the splits of the indices. For example, you could trade the S&P 400 midcap index using the SPDR S&P Midcap 400 (MDY | A-84). That's an ETF we suggest accumulating on market pullbacks from a long-term perspective.

Or you can trade an ETF based on the growth portion of that index, or the value portion of that index. You could do the same for the S&P 500, which is large stocks, and you could do the same for the S&P 600, which is small stocks.

That gives you a little grid of nine ETFs: large-cap growth, small-cap growth, midcap growth; large, middle and small blend (which is what we call the ETFs that combine both the growth and value components); and small-, middle- and large-cap value.

You can move around just among those nine ETFs as market trends change. For example, this year up until fairly recently, small-cap growth did really well. Despite the fact that "the market" didn't do much of anything, small-cap growth did a lot.

The third area I really like in ETFs, that we just finished talking about, are all those group and sector ETFs.

So those would be my favorite three areas in the ETF world—the group and sector area; the size and style area; and the volatility area.

ETF.com: One area that declining is the commodity markets. We're hitting multiyear lows in all of these commodities. Do you see the downtrend continuing from here?

Bollinger: The commodity markets tried to put in a bottom, and failed. So we're in another downtrend here. We're going to have to look for a bottom to form. I hate to put it so simply, but we're going to have to wait for prices to stop falling.


In the long term, we're setting up for some tremendous opportunities in the commodity markets: the energy markets, the precious metals markets and some other related markets. But clearly, the selling and the liquidation process is not over yet.

ETF.com: What's your outlook for the S&P 500? We've been range-bound all year long. Is it ready to break one way or the other?

Bollinger: We have a tremendous amount of compression in the S&P 500. In terms of Bollinger Bands on the weekly S&P 500, we're at a 20-year low. That's a huge amount of compression. We think we're going to see a correction to the downside first.


It may not be a major bear market, but we think we're going to see some downside action here, possibly into the early fall, and then we'll reassess the situation. It could well be that it's just a correction that leads to another upswing in a bull market. But we'll need more evidence as we go forward to make that conclusion.

ETF.com: Is there any way to say how far along we are in this bull market? It's been six years now. Historically, is that a long time?

Bollinger: It is. We like to say the bull is getting long of tooth; there's no question about that. But corrections—if this turns out to be a correction—can refresh the bull market.

If you go back and look at the history of stocks, you can see that, often, bull markets have substantial corrections and then go on to have another leg up. Right now, it looks like we may be in for merely a correction, but if there's a lot more damage done, it could turn into a bear market.


Contact Sumit Roy at [email protected].

Sumit Roy is the senior ETF analyst for etf.com, where he has worked for 13 years. He creates a variety of content for the platform, including news articles, analysis pieces, videos and podcasts.

Before joining etf.com, Sumit was the managing editor and commodities analyst for Hard Assets Investor. In those roles, he was responsible for most of the operations of HAI, a website dedicated to education about commodities investing.

Though he still closely follows the commodities beat, Sumit covers a much broader assortment of topics for etf.com, with a particular focus on stock and bond exchange-traded funds.

He is the host of etf.com’s Talk ETFs, a popular video series that features weekly interviews with thought leaders in the ETF industry. Sumit is also co-host of Exchange Traded Fridays, etf.com’s weekly podcast series.

He lives in the San Francisco Bay Area, where he enjoys climbing the city’s steep hills, playing chess and snowboarding in Lake Tahoe.