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

Typically, I think most investors have a kind of a dream in the back of their minds that wouldn't it be a terrific trick to have sold out on the absolute top day of a bull market. The bragging rights from that would last a lifetime. But the actual facts are if you were to have sold out on the absolute top day of bull markets over the last 100 years, your portfolio would on average be off probably 10% or more and 20% to 22% of your portfolio would already be off 20% or more -- just as the Dow Jones Industrial Average was just reaching its peak.

Well, after 2000, I'll bet there were plenty of people who would be thrilled to be off only 10% or 20%, given the destruction we saw on the Nasdaq after that.

Absolutely.

So, it sounds like this is really a fascinating way not only to look for market tops, but to think about market tops. Meaning that, when the market is actually topping out by these narrow indexes -- be it the Dow, or the Nasdaq -- it really means that a lot of other stocks have already started to fall off the trees, as you suggested. And the highest profiled, best-known stocks are the ones that are continuing to go up, and that is reflected in both the breadth data and the new 52-week high data. Is that a fair way to describe it?

That is exactly right.

To an individual investor who may be reading this, is there an indicator they can follow? The dominant theme of the chatter seems to be pretty bullish lately. If people want to know if the market is in a topping process, what would you suggest they look at? Meaning, what would you advise someone's mother-in-law? When do they throw in the towel and wait for a sunnier day, to mix metaphors?

I think the first thing an investor has to do is realize that when the news gets so good, that it just can't get much better, that that is the time to look out, to be careful. Major market bottoms are always surrounded by enormous amount of bad news, and yet that is the right time to be buying.

You have to be willing to buy in the face of bad news. By the same token, at market tops, the news is dominated by good news, and that is the time to watch out because if the news can't get any better then all it can do is get worse.

How would you describe the news environment we are in? I thought the news was pretty cheery in the fourth quarter, but we have started to see some cracks in the facade this quarter.

Well, I think generally the news is pretty positive. People are convinced that the Feds are about to stop raising rates, the unemployment numbers are down substantially and the politicians are out promoting the idea that the economy is stronger than it has been for a long time. And generally the news is good.

Outside of the geopolitics out of Korea, or Iran, or Iraq, or Israel, or Russia or China, but domestically, you think generally the tenor is pretty positive. If that is the case, what are you seeing in terms of the advance/decline line? What are you seeing in terms of new 52-week highs at this point?

Well, number one, one of the things you want to watch as a long-term indicator is the number of stocks reaching new highs. And usually that is recorded in the paper as new 52-week highs. And that indicator reached its peak back in July of 2005 and has been diminishing since that time.