Steve McDonald: Hi, everybody, I’m Steve McDonald. This is your Market Wake-Up Call. Our guest this week is Alexander Green, Chief Investment Strategist at The Oxford Club. And for my money, he’s the best money mind in the business. He’s taking the time this week to be with us to talk about what I’m sure is on the mind of every person watching this: What the heck is driving this market, and how long is it going to run? Alex is also the editor of The Oxford Communiqué, three trading services, including The Momentum Alert, and the free e-letter Liberty Through Wealth.

Steve McDonald: Welcome, Alex.

Alex Green: Hey, Steve. Thanks for having me.

Steve McDonald: It’s my pleasure. Now, new highs seem to be the order of the day for the S&P and the Dow. Back-breaking volatility, a bond market rally – along with stocks, an economy that’s chugging right along, low inflation, relatively low interest rates… How did we get here?

Alex Green: Well, it’s been a long ride. As you’re probably aware, the U.S. economic expansion hit a record recently. This is now officially more than 10 years old. That’s longer than the big broad expansion of the 1990s, and the stock market likes it. Economic growth is better than 3%. Interest rates, as you noted, are still quite low. Corporate profits are high. The dollar’s relatively strong. The consumer is healthy and optimistic. Both business and consumer confidence are up. So there are a lot of good things happening, and that’s being reflected in the stock market.

You talk about the volatility – that’s an inevitable with stocks. But the negative headlines are just the nature of the news. The things that aren’t bad aren’t newsworthy. Most things happening most days are actually quite good but not newsworthy because incremental positive change makes a terrible headline. But the backdrop is actually quite positive.

Steve McDonald: The negative news never seems to stop despite the fact we’ve never seen a better market economy. We’ve got a somewhat accommodating Fed. Everything seems to be fitting perfectly. But you and I have been around long enough to know this can’t last. What advice can you offer to people about the unavoidable, inevitable downside of this kind of a run?

Alex Green: Well, I would begin with saying that no matter how optimistic you are about the future, you should first of all look at your asset allocation and make sure you don’t have too much in stocks. If you’ve been taking advantage of this wonderful bull market, you probably have a lot more in stocks than you did three years, five years or 10 years ago. You might want to trim back and increase your bond holdings or diversify into other things that are not correlated with the stock market. You want to make sure you broadly diversify – that you’ve got growth stocks as well as value stocks, foreign equities as well as domestic ones and large caps as well as small caps. And you want to make sure you’re running your trailing stops because those will protect your profits during the good times and protect your principal during the bad ones.

So, if you’re doing those things and your portfolio is fundamentally sound, the inevitable bump along the way – or even the inevitable bear market, which is out there somewhere – is not a great problem. Because just as every bull market is followed by another bear market, every bear market is followed by another bull market. And the history of the market is higher highs and higher lows. So both long-term and short-term investors have reason to be positive.

Steve McDonald: Now, there are forces in the market that the average guy can’t see. These are trades that are being posted and huge amounts of money being moved around in what I call a stealth market. How is this affecting the market, and can the average guy get in on the pressure that these unseen trades have been driving?

Alex Green: Yeah. These are actually technically called “dark pools,” Steve. And as you may know, much of the institutional trading every day takes place in these really highly liquid, mini-exchanges where investment banks and fund managers cross blocks of stock in private transactions.

Why do they do this? Because people are watching the volume. If a stock is going up day after day and week after week, people are watching the volume. A stock going on light volume doesn’t mean a whole lot. But a stock going up on heavy volume means something is happening. Either a mutual fund, hedge fund, pension, endowment or some other institutional investor is taking a big stake, and they don’t want people to come in and ride their coattails. So they try to hide what they’re doing in so-called dark pools where they can trade blocks of shares with other institutions off the main exchanges and thereby sort of disguise what they’re doing.

It is kind of a stealthy way for a big investor, the institutions, to take advantage of these dark pools. But individual investors can’t trade in dark pools themselves because they don’t have the requisite capital to be able to make those kinds of trades. But if you know what’s going on – and I monitor dark pool activity – and you see what’s happening, then you can often take advantage, especially with momentum stocks because those are the ones that are under heavy accumulation. If you can see that the dark pool activity is picking up and the share price is rising on the New York Stock Exchange or Nasdaq, you generally have a good indication that if the company’s firing on all cylinders, sales and earnings are up, return on equity is high, and volume is good, then you’re likely going to have a nice short-term trading situation.

Steve McDonald: Just as a side note, Alex, do you think the market now is being run just for institutions or run by institutions?

Alex Green: Well, indirectly, the little guy is an institution. Everybody who has money at Vanguard or Fidelity, when Fidelity goes in the market to trade, you’re a part of that. Or a larger investor might have money in a hedge fund. But the individual investor oftentimes is not invested in individual stocks but in mutual funds, so they are part of the institutional trading as well, just in the aggregate, not individually. So the small guy benefits sort of indirectly from the mutual funds, but if you want to trade for maximum profits, you have to own the individual companies that are seeing this massive accumulation of shares off the market in the dark pools.

Steve McDonald: Alex, thanks so much for taking the time to be with us today.

Alex Green: Thanks for having me, Steve.

Steve McDonald: It’s my pleasure. Just below there is a link you can click on to get a copy of Alex’s most recent report about these dark pools, this huge institutional buying pressure that you can be a part of. You don’t want to let this one go by. I’ve never read anything by Alex Green that I didn’t learn something from. And again, Alex, thank you so much for being a part of this. We’ll see you next week, everybody.