by FS Staff
Lowry Research's Senior Market Strategist, Richard Dickson, joins Jim Puplava on the Financial Sense Newshour to help answer the question of whether the bull market is over. Richard cites two key metrics, buying power and selling pressure, and says the current stock market is acting the opposite of what one would expect if this was a major peak.
"If we're approaching a top you should see a fairly significant rise in selling pressure. And the interesting thing is if you look at what people would call 'the top' in the market, which really formed from late December to around January 22nd or so, you actually saw a drop in selling pressure and a small rise in buying power. This is exactly the opposite of what you'd expect to see."
Richard Dickson and co-author Tracy Knudsen identified how buying power and selling pressure behave over the past 50+ years for major tops and bottoms in the market. In the following interview below, Richard explains the importance of these two key measures and why, for example, he doesn't think investors should fear a 1929 market crash right now.
Jim Puplava: Richard, I wanted to have you on the program because you follow two measures that are key tools at Lowry Research: buying power and selling pressure. I wonder if you could bring us up to date. In this downturn, was it caused mainly by an increase in selling pressure, a reduction in buying demand, or a combination of both?
Richard Dickson: Sure. We had a lot of selling obviously with prices going down, but we had two bouts of really intense selling. On January 24th, just a couple days after the January 22nd high, we had what we call a 90% down day. That's the case where down volume is 90% or more of the total up-down volume derived from the New York composite volume. And, also, we have something called points-gained/ points-lost. So, in this case, for the 90% down day, points-lost would be 90% or more of the total of points-gained/points-lost. That is one of our key measures that we use to gauge the intensity of selling. So we had a 90% down-day on January 24th and this whole decline that culminated on February 3rd was the second 90% down-day. So we had some very clear evidence of very intense selling, the only question in our minds was that enough to really establish an important low.
Jim: Have you reached any conclusions? Was it enough or do you think more is coming?
Richard: The second side of that, of course, is not only do you have to have signs of selling but you also have to have signs of demand. And that's what's going to make prices go back up-- is to have very strong buying. And we definitely did have indications of that primarily from our buying power and selling pressure indexes. Generally speaking, we'd be looking for something like a 90% up day following those 90% down days to give us evidence that you're seeing very strong selling. We actually didn't see any 90% up days…We did have two 80% up-days: one was on Tuesday and the other one was on Friday, where we had those signs of very very strong buying, but most important were the gains we had in buying power and selling pressure. Actually what happened on February 6th and February 7th is we had two days where we had a six-point gain in buying power and that was followed on the 11th by another six-point gain in buying power. We have to go back to, I believe, 2012 to find an equivalent gain in buying power and that came right off an important bottom. So we did see very clear evidence in terms of the trend of demand measured by buying power that told us that, yes, we did see that very strong demand come in. What we ended up with was the two 90% down-days, suggesting that supply had been exhausted, and that was followed by these very strong gains in our buying power index, which suggests that strong demand had now come back in the market. That's a formula for a good rally.
Jim: So, when you're looking at this and, of course, everybody is saying, "Is the bull market over?" as people are looking for a stock market top but, Richard, from your buying-power/selling-pressure gauges, what would you expect to see if we were indeed approaching a top?
Richard: If we're approaching a top you should see a fairly significant rise in selling pressure. And the interesting thing is if you look at what people would call the top in the market, which really formed from late December to around January 22nd or so, you actually saw a drop in selling pressure and a small rise in buying power. This is exactly the opposite of what you'd expect to see. Tracy Knudsen and I wrote a book called, "Mastering Market Timing," where we looked at major market tops and major market bottoms going back to the mid-1960s; and a common characteristic of all these tops was a very clear cut rise in selling pressure. So, we didn't see that here at what anyone would call a top from late December to late January. Instead, we saw a small drop in selling pressure. That was one of the first clues we had that really said all this talk about a major market top, and the analogs that you're seeing out there about how similar the patterns are to 1929 more or less, were not going to prove accurate.
Jim: So, when you see those kinds of things then that tells you, no, this isn't a market top. I mean if we were to have a rally where you were to see in that rally selling pressure increasing, that would tell you more that you're moving towards a market top?
Jim: And there's no evidence from your work right now studying these markets that is indeed taking place?
Richard: Oh no. I didn't mention selling pressure but over that same four day period, selling pressure fell a net 15 points. So, if we needed any kind of confirmation that those 90% down-days served to exhaust supply, that very sharp drop we had in selling pressure for the first few days of this rally really confirmed it.
Jim: And when you see these market tops forming, Richard, nothing goes straight down. So what you see is these rallies and bounce backs, but in every rally the selling pressure increases and the buying power decreases. So, as the sellers slowly take over the buyers, you stair-step your way down, which is more reflective of a top, and from what you're describing that just isn't taking place.
Richard: That's correct. Plus, going into this supposed top in the market here in late December, you generally look for divergence in the advance-decline lines. We follow not only the New York composite, but we have our own operating companies only advance-decline line, which covers just common stock from the New York Stock Exchange; we follow advance-decline lines for the S&P 500, for the 400 mid-cap, 600 small-cap-none of those were showing divergences going into the top. I think the small-cap might've been lagging by a small amount, but that was it...you're not seeing any condition, anything similar, certainly to any other bull market top, not to mention 1929.