Steve McDonald: Hi, everybody. I’m Steve McDonald. This is your Market Wake-Up Call. The topic in focus this week is the bull and bear tensions in the markets and who’s winning, if anybody. If you follow the market, and I have to assume if you’re watching this then you do, I don’t have to tell you that there is a ton of pressure on both the bull and the bear sides of the market. And after December and January, it isn’t getting any clearer as to who’s winning. Each week, we’re treated to a multitude of indicators, good and bad, about where the market is supposed to be heading. Now, adding to the confusion is the fact that the market prognosticators all seem to have different time horizons to their predictions, and both fundamental and technical indicators are pointing in both directions.

Take a look at the list of technical indicators on your screen now. They’re taken from a Wall Street Journal article from last week that claims we’re in a “bull trap.” That’s a bear market but with a bull phase: negative relative strength index (RSI) divergence, moving south, correction, counterrally, alleviating oversold conditions, coming end of a business cycle, a reversal in yields, suddenly halting its rate hike cycle, etc.

Every indicator is negative. But on the other side of the aisle, all the numbers are pointing up: stocks, employment, rates, energy costs, etc. You get the picture, I’m sure, or maybe the real truth is that nobody’s getting the picture. Just one day’s headlines in the Journal has this type of divergence. “How to Invest in a Down Market” is one headline, then “Stock Market Rally Revives Appetite for Risk,” next is “China Fears Loom Over Stocks After January Surge” and then “The Malaise in the Global Trade Is Only Getting Worse.” And that’s just from one page from one day in the Journal. Oil’s up; oil’s down. The market is plus or minus 3,000 points. This is getting too crazy, or is it?

With us today are two market mavens who are here to shed some light on what has become a national obsession. Richard Smith is the founder and CEO of TradeStops. He has a Ph.D. in math and systems science and has developed a trading system that he says replaces emotion with math in investment decisions and increases return while decreasing risk. I like that – everybody should like that. And we have our own Alexander Green, Chief Investment Strategist at The Oxford Club – a 30-plus year veteran of the markets who has singlehandedly developed almost all of what we now know as The Oxford Club. Welcome, guys.

Alex Green: Hey, Steve. Thanks.

Richard Smith: Thrilled to be here, Steve.

Steve McDonald: Yeah, you’re both in the up-and-coming Bull vs. Bear webinar in a couple weeks. Is that right?

Alex Green: Yes, indeed.

Richard Smith: Absolutely.

Steve McDonald: Yeah, we’ll talk a little bit more about that in a few minutes. But first, I don’t envy your task here today because this market has been a real spine-snapper. Let’s start with an overview. All of us have been in the markets for years and have seen major ups and downs over the decades. Is this market any different, other than the length of time that it’s been running up? I mean, honestly, is it any different?

Alex Green: I think the market’s different in that, first of all, we’re in just about the longest economic expansion in history, and we’re in a bull market that started 10 years ago essentially. So it’s different in that respect. But there’s an old saying that bull markets climb a wall of worry. We’re worried about interest rates going higher. We’re worried about the economy slowing down. We’re worried about trade agreements with our major partners. There are always things to worry about, but I think the fundamental backdrop is still very positive. And look at low interest rates, inflation that’s completely missing in action, cheap energy, an expanding economy, near-record-low unemployment, rising corporate profits, record corporate profit margins and the trend since the fourth quarter. We know the fourth quarter was a nasty one – but so far in the new year, the bulls have had their way. So I think that both the fundamental and technical backdrops right now are positive.

Steve McDonald: All right, Richard. Where are we going? Are the markets moving up or down?

Richard Smith: Well, I think Alex makes some great points, and it’s really where are we at in the cycle, right? All of this positive information is exactly the kind of thing we see at market tops too. So are we at a top or are we in kind of a period of building up more worry that can carry us through more of a bull market in 2019? I think the reversal that we’ve seen off the lows in the past month was shocking. The lows that we saw in sentiment back in December were really unprecedented – some of the worst sentiment of all time and the most fearful retail investors have been. But now we’re moving back into levels of greed that we haven’t seen for a while. So I think the word of the day is volatility. That’s exactly what we’re seeing in markets, and people have really kind of forgotten what volatility is.

I think volatility is part of what we’re going to see in 2019, and I think that’s exactly what people are going to be wrestling with all year. It’s a big part of what we’re going to be talking about at the Bull vs. Bear Summit that Alex and I are both part of next week – very excited about that.

Steve McDonald: For each of you, what’s the greatest pressure on the market right now? If volatility is the key word and people aren’t used to it, what’s driving the volatility?

Alex Green: Well, actually it’s been a pretty smooth ride up so far in 2019. The volatility was in the fourth quarter and, in particular, in December. But if I have to say what the greatest risk facing the market right now is, it’s that the market celebrated the fact that the Fed has taken a more dovish stance on interest rates, so that stumbling block is out of the way. And the market has also rallied on the idea that a trading impasse between China or with our trading partners in Europe is a bad thing, and everybody wants a winning situation. So we’re going to get a deal here soon. If we do get a deal, I think stocks could rally, but if we don’t get a deal, that would be crushing news for the market. That could certainly set us back a bit. But it’s hard to invest based on purely what I call exogenous events, which are things that are outside the realm of sales, earnings and business fundamentals. And you never can know if there’s going to be a hot war in the Middle East or a major terrorist attack or a hedge fund blowup or a trade deal that doesn’t come together. So you really have to be prepared for if the market goes up or the market goes down. But I would make the case right now that fundamentals are strong and technically we’re in an uptrend, so I’m in the bullish camp right now.

Steve McDonald: How about it, Richard?

Richard Smith: Well, overall I’d probably lean a little bullish, but, Steve, I am very worried about the technical action that we’ve seen over the past month. I think that we could be looking at a retest of the lows, if not further downside, before all is said and done. I just have a hard time believing that all the carnage that we saw in December was just a temporary blip. And I think that prices are rising, but they’re rising on declining volume. I’m probably a little more on the technical side than Alex is. I’m worried about this market, as I think a lot of people are. In the end, and I know Alex will agree with me on this, ultimately it’s not really about whether you’re right or wrong in your predictions; it’s about how you really manage your portfolio, whatever happens in the markets, right?

Steve McDonald: And that brings up an interesting point. I mean, I say very often in articles that the only guarantee in the market is that it will eventually sell-off. It is an absolute guarantee. That’s why it’s a market, and that’s been the common thread through years. It could be a correction, cratering in some cases, but then they always run to new highs. Now doesn’t that negate all the market guessing that’s going on right now?

Alex Green: I think that on the one hand, yes, behind every bull market is bear market. That’s a given. And behind every bear market is another bull market. So yes, we have higher highs and higher lows, and that’s the long-term direction of the market. Most people who are active investors and traders want to make as much as they can during the bull market phase and protect as much as they can in the bear market phase. And so it makes sense to use tactical asset allocation, to use trailing stops, to use position sizing and to use various techniques, so no matter what you think is likely to unfold in the market, in case it doesn’t pan out that way, you still have plenty of upside when times are good and you still have your downside protection when things aren’t so good. And so I think that’s one place where Richard and I can agree: Every investor has to deal with an uncertain future. The question is: How do you do it? Do you do it by just guessing, hoping and wishing that things turn out the way you want? Or do you take objective, rational actions that allow you to make as much as you can in the good times and protect as much as you can in the bad times?

Steve McDonald: Richard, what do you think?

Richard Smith: This is exactly what we’re going to be talking about next week at the Bull vs. Bear Summit. We’ve put together a world-class panel of bulls and bears, and we’re also going to be talking about how to manage risk no matter what the market does in 2019. So I’m really looking forward to continuing this conversation and getting into you with it, Alex, next week.

Steve McDonald: I’ll be there. I think everybody is. What’s the date? Who else is going to be there?

Richard Smith: It’s February 13. In addition to myself and Alex we’re also going to have Dr. Steve Sjuggerud and Whitney Tilson – famous hedge fund manager and college roommate with Bill Ackman. We’ll also have Glenn Tongue and finally, Dan Ferris, one of the great value investors in the newsletter business. So there’s going to be some fireworks.

Alex Green: It’s an interesting group of guys for sure.

Steve McDonald: Okay, thank you. And thanks to both of you for being here – for taking the time to be with us. And for those folks watching, click on the link for this Bull vs. Bear Summit. It’s going to be at the end of this video. I promise you, there’s going to be some great information in there. Guys, once again, thanks so much for being with us.

Alex Green: Thanks for having us, Steve.

Richard Smith: Absolutely – love it, Steve.

Steve McDonald: And for everybody else, I’m Steve McDonald. Thank you for being a part of this, and we’ll see you next week.

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