Well-Known Technician Still Sticking to His Bearish Call

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Thoughts from Saturday's Technician podcast with Richard Dickson, Senior Market Strategist at Lowry Research, which can be listened to in full at Financial Sense Newshour here or on iTunes here.

richard dickson lowry

Several weeks before the market's double-digit correction in August, Lowry Research's Richard Dickson told Financial Sense Newshour listeners that the bull market in stocks was likely coming to an end within a matter of months. Even with the strong rebound off the August-September lows, Dickson said their outlook hasn't changed. 

Richard notes that Lowry’s measures do not provide a bullish outlook on the stock market. One thing they track is the level of buying pressure (demand) and selling pressure (supply) for stocks.

Even with the recent rally, “you would expect supply to dry up…along with a rise in demand,” Dickson said. Instead, just the opposite occurred, which indicates to them that we experienced a "rebound rally" that is unlikely to propel stocks much higher, noting the possibility that a major trend change may have been seen in August.

Dickson also noted ongoing problems with the advance/decline (A/D) line (the overall number of stocks moving higher versus lower). This measure is well below both the May and July peaks in the market and he said "We’ve got nothing in the A/D line to suggest any kind of strength.”

advance decline line

The behavior of market segments is an additional concern for Dickson. “Leadership has been focused in a very narrow number of big cap stocks,” he notes, with the percentages of small cap stocks down 20% or more remaining at similar levels to a couple of months ago.

Certain sectors also tell the tale of an unhealthy market. Dickson observes that the consumer discretionary sector is one of the best performing sectors on a weighted basis, but when he looks at the sector on an unweighted basis, the sector is among the worst performing parts of the market. Select large cap names like Amazon, Nike, Home Depot, and Starbucks have been making the consumer discretionary sector appear healthier than it really is. For Dickson “this really speaks to the market overall and to the character of the rally that we have just seen.”

Globally there is no evidence that any of the rallies in foreign stock markets are anything more than rebounds within an ongoing bear market. Dickson points out that even in the case of Japan, which has had one of the sharpest rallies in recent weeks, the buying pressure and selling pressure gauges measured by Lowry Research have gone nowhere, which is a negative sign.

Overall, Dickson currently sees a greater similarity to the major market peak in 2007 than the more minor cyclical bear market of 2011. In 2007, Lowry Research warned investors of impending problems in the markets, and was able to help clients avoid significant losses.

Although he is cautioning clients to get defensive at the moment (either by raising cash, or by focusing on higher quality stocks), he is not yet ready to tell clients to begin aggressively hedging or shorting the market. The reason is that Dickson has not seen the kind of big down day on heavy volume—meaning 90% of the market down with 5-7 billion shares trading hands—that would confirm to him that “we are going down and not coming back.” At the moment he is not sure we have seen the final top, but believes that caution is very much warranted.

Listen to this full interview with Richard Dickson, Senior Market Strategist at Lowry Research, by clicking here. For a complete archive of our broadcasts and podcast interviews on finance, economics, and the market, visit our Newshour page here or iTunes page here. Subscribe to our weekly premium podcast by clicking here.

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