Q&A: Paul Desmond of Lowry's, Part II

Let's talk about that. You recently gave a presentation to a room of professionals where you asked them a series of questions. You were surprised by them, and they were surprised by what you told them. Would you talk about that?

Well, I had a group of professional portfolio managers that we were addressing, and I wanted to tell them about this new study that we had just done. And I asked them, 'What percentage of stocks would you expect would be making new highs at the top day of the bull market?' In other words, when the Dow Jones was making its absolute high, what percentage of stocks were also making new highs?

I asked, 'How about 80%?' and there were a lot of hands. Then I said, 'How about 70%?' and there were a slightly smaller number of hands. 'How about 60%?' and smaller number yet. And I think I took it down to about 50% or so.

And I said, 'would you believe 6%?' There was this complete silence in the room. Of the 14 major market tops, between 1929 and 2000, inclusive, when the Dow Jones Industrial Average reached its absolute peak, the average percentage of stocks also making new highs on that day was 5.98%.

How about within a few points of their highs?

Well we also looked at stocks within 2% or less of their highs. That number was 16.88% on average for these 14 occasions. Now those numbers range significantly, the lowest point was 6.23% up to a high of 22%. But that still meant that 80% of stocks were not making new highs at the same time the Dow Jones Industrial Average was at its high.

And you also point out that a significant number of stocks not only were not make making highs but had already dropped more than 20% from those highs.

Yes, that's right. On average, the number of stocks making new highs along with the Dow was 5.98%, but the number of stocks that were off 20% or more from their highs was almost 22%. And in the 2000 case -- which I thought was particularly interesting -- as the Dow Jones Industrial Average made its all-time high on Jan. 14, 2000, 55.33% of stocks were already off 20% or more from their highs. So that meant that the bear market had really started substantially before, at least many months before, the Dow Jones Industrial Average reached its peak.