Each week we interview some of the best market technicians to discuss major trends and developments in stocks and various other asset classes. This week we spoke with Richard Dickson of Lowry Research who says that they still aren't seeing any of the characteristic signs associated with major peaks and that it's way too early to start worrying about a Dow Theory sell signal with the divergence between the Dow Jones Transports and the Industrials. That said, Richard says the market is overbought and investors should wait to put more money into stocks until we get another pullback. Also, he is suspicious whether we've seen an ultimate bottom in energy and thinks it may just be an oversold bounce.
Transcript
The Dow and S&P are trading in record territory while the Dow Transports lag, which is surprising given the lower cost of fuel. Do you see this as a worrying sign?
“As far as Transports are concerned, obviously some people are raising the specter of a Dow Theory sell signal with a non-confirmation of the highs in the Dow Industrials by the Transports—we shall see. The important point there is they both have to fall below an intermediate-term low, which in this case should be the lows that we established in the middle part of December and tested several times in January. So it's a bit premature to start worrying about a Dow Theory sell signal, especially if this market just has a minor correction—and really that's all we're anticipating—and then proceeds to higher highs. You could very easily see the Dow Transports move right up along with that. As far as the lag in the Transports…what I suspect is that the airlines, which have been leading the way with a huge run, might simply be taking a bit of a breather right now and have discounted a lot of good news, particularly in terms of the lower oil prices and better economics that they're following. So that could well be that they mark time for a while, fully digest those earlier gains, and then head higher again. It's way too early to draw any bearish conclusions from a divergence between the Dow Industrials and Transports.”
Your research firm pays a lot of attention to buying power and selling pressure and how that changes over the course of peaks and bottoms in the market. During the sideways motion in stocks over the past couple months did you observe any indications of distribution or selling pressure associated with a top?
“We looked at that pretty closely to see if there were signs of accumulation or distribution taking place and actually both of those indexes moved essentially sideways. There wasn't any big drop in buying power nor was there any significant rise in selling pressure and the conclusion we reached from it was that this trading range didn't represent anything more than indecision on the part of buyers and sellers. You couldn't sustain any buying or any selling and, as such, it was sort of a neutral for the market. We were reluctant to draw any big conclusions from it. Certainly, our longer-term indicators gave no hint that we were in the process of forming a major top so our anticipation was that this would more than likely be resolved to the upside…and that’s what happened.”
Explain to our audience one of the things you look for as a cautionary sign that we are approaching a major top in the market?
“Well, the classic signs are signs of a deteriorating advance-decline line. We use the operating companies only (OCO) advance-decline line, which is comprised strictly of common stocks. We think that much more closely approximates the advance-decline line from years earlier. Over the last 10 and 15 years we've had a lot of hybrid products, many of which are interest sensitive that have begun to trade on the NYSE. So the New York Composite advance-decline line quite often reacts more to changes in interest rates than it does to say underlying economic factors and by influence the price of stocks. So the OCO is something we follow very closely and that is making a series of higher highs. We would be looking for that kind of divergence where the OCO fails to confirm highs in the price indexes—the S&P, the Dow Jones, the New York Composite for instance; a non-confirmation of the advance-decline of highs in those price indexes is usually an early warning of an approaching market top somewhere in the range four to six months out. I haven't seen anything like that yet...”
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