Editor's note: In part I of Barry Ritholtz's interview with award-winning technician Paul Desmond of Lowry's Reports, Desmond discussed his research identifying market bottoms. Today, he talks about a more recent analytical paper that looks at how to identify market tops:

I just got an email from a friend who I had pinged before and mentioned I was speaking with you. He writes: 'Tell him I loved his early work with the Dave Brubeck Quartet.' I don't know how many times you've heard that joke.

(Laughing) Oh, many, many times, yeah.

OK, all kidding aside, let's talk a little more specifically about your most recent paper analyzing market tops. You've put forth the idea that markets at tops give very identifiable signals, that markets can be timed, that "buy-and-hold" really ignores a lot of information that comes at you. Is that a fair statement? .

Yes, it is very fair. I think the problem is there are an awful lot of investors who will say you can't time the market.

Well they are saying 'they' can't time the market. They're not saying 'you' can't time the market (laughs).

'They' can't time the market. And I think what they are doing is looking at fundamental information. And if you are looking at fundamental information, I think you are absolutely right. You cannot time the market off of fundamental information, because the stock market operates off of expectations as to what is going to happen six months or nine months down the road. In other words, investors don't buy stocks because of what they know today. They buy because of what they think they are going to know six months or nine months from now. So the market is always ahead of the economy. And as a result, if you are trying to look at fundamental information, you are always too late.

If you look at technical information, you can see signs of changes in investor psychology that are consistent from top to top. And that's what this study that we just did shows very clearly, is that there is an extremely repetitive pattern that occurs at major market tops, and that pattern is one of selectivity.

Meaning the market becomes increasingly narrow as it progresses?

Exactly. There is a process that goes on from day to day, when investors begin to run out of money. They've invested everything that they've got to invest, and therefore they are out of the game of buying stocks. At that point, they are simply holding, expecting the prices will go higher.

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