In a recent interview with Financial Sense Newshour, the Senior Market Strategist for Lowry Research, Richard Dickson, said that investors are getting nervous about chasing stocks at these levels, but not nervous enough to sell. He also said that "we're certainly not seeing any signs of a major top," but with the market becoming increasingly selective, it is important for investors to stick with the strongest performing areas.
Here is a partial transcript of his interview that aired on Saturday's podcast (click here for full audio):
What are your buying and selling pressure gauges telling you right now?
"Probably the clearest thing that we’re seeing right now is a lack of demand… The saving grace for the market has been the fact that selling pressure, which measures supply, has been essentially flat… People may be getting a little bit nervous about chasing stocks at these levels, but they’re certainly not nervous enough to start selling."
Is this the same type of behavior you typically see between buyers and sellers near a market top?
"The only increase in selling pressure we saw was back in 2011 when we had the big drop in the market; about a 20% drop in the S&P. But that’s been it. Otherwise, the selling pressure index has been consistently trending lower. So that is unusual…[but] we’re certainly not seeing any signs of a major top…"
Let’s dig into some of the market sectors. Which ones are performing the strongest right now?
"Consumer cyclicals and financials…have been outperforming so far in this quarter. Now, year to date, the three top performers are health care, information technology, and utilities; utilities obviously have dropped off. They are one of the weakest performers. In fact, they are second to last just above energy in terms of performance in the 3rd quarter. But health care and info-tech seem to show the most consistency in terms of their strength and what you have seen this quarter is you’ve seen finance and consumer discretionary stocks come back."
Expectations are that the Fed will start raising interest rates sometime around next summer. If this were to happen, what sort of market reaction do you expect?
"A lot of it depends on why rates are going up. If the economy is showing signs of continued strength—you know, real strength—rising rates are not necessarily a bad thing. Keep in mind, not in every bull market, but in the vast majority of bull market tops, you see bond prices peak prior to the stock market. As interest rates start to go up…bond prices go down and eventually the stock market goes down too. So, it’s not a coincidence thing by any means. The reason for that is that interest rates are going up simply because the economy is getting stronger and you are seeing stronger earnings and those are being reflected in rising stock prices."
Let’s talk about time frames. Given that we’re now 5 years into this bull market, do you think we can go much longer?
"Well, when you think about it, you had a bear market in 1990, and what some people call a stealth bear market in 1994. But as far as the indexes are concerned, there was nowhere near a bear market. You really didn’t have a real bear market until 1998. And that was another short one—short between 1982 and 2000. So, realistically, you had about a seven year stretch where there was really no bear market. So it’s entirely possible."
So, in this kind of market, what would you be doing here?
"Well, the thing we’ve been emphasizing is that this market is becoming more selective. I mean, if you look at the small cap indexes for instance, they’re running far behind what is going on in the S&P and the Dow Jones… Even though this market is not showing signs of topping out, when the final top occurs, it’s not going to be all of a sudden everything goes down [since]…many stocks have already fallen into bear trends… So it’s important to become increasingly selective and reviewing your portfolios to look for those particularly small cap stocks [that are underperforming]…cull those and reinvest the money in the stocks that are performing with the market, which right now, for the most part, are big cap stocks."
Some estimates show that only about 14% of Americans own individual stocks. And in this market, the two big buyers or supporters of stock prices have been central banks and companies buying back their own stock. But it seems most of the public is still sitting on the sidelines.
"That may be one of the explanations for why volume has gone down the way it has. You know, when companies buy back their own stock and reduce the float, it also means they are reducing the amount of volume of a traded stock. So, that could be an explanation of why you’re seeing volume trending lower over the last four, five years."
Would you say at this point to stay invested but maybe trim what isn’t working and then add to those areas that are more promising in terms of valuation or growth?
"Absolutely. The idea is that when the market finally does top, your portfolio is only in those strongest stocks. It doesn’t help to say, well, we’ve reached the bull market top and the average stock in your portfolio is already down 10% or 20%. Who cares? You’ve reached the top of the market, but who cares? It’s not in your portfolio. So when the bull market does top, there’s going to be many, many stocks that have already fallen into a bear market. And it may well be the top in your portfolio occurred a year or more before the market finally topped. So then the rest of that move up in the market has done you virtually no good whatsoever. So it’s really important when you are in this late stage of a bull market that you really concentrate on continually refreshing your portfolio so that you’re focusing on those strongest stocks and culling out those things that are underperforming."
As always, we appreciate you coming on the program. If our listeners would like to follow your work, how can they do so?
"The easiest thing to do is very simply go to “Lowry onDemand” or “Lowry Global,” put that in your search engine and that will take you to our website where you can have a free tour and also a trial subscription for any one of our various services."
Richard, as always, thanks for coming on the program and have yourself a great weekend. We’ll be talking to you again.
"OK. Thank you very much for having me."
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