Part II of the Paul Desmond Q&A is posted at thestreet.com (free)
This is the half that really focuses on market tops. If you read just one thing this weekend today, this is it.
Here’s an excerpt:
BR: So according to your analysis of bull-market tops, where do you think we are in the cycle. Are we close to the top, getting near the top? Weeks or months away? What’s your general take, without scaring the bejesus out of everybody?
PD: "We are well in the process of forming a top, but we are not to the final stage of this thing yet.
If we were to measure the final top, based on the Dow Jones Industrial Average, — which is not the best way to judge a bull-market top — it is very possible that the Dow has not made its final high yet.
This past week, we took a look at the Dow Jones Industrial Average stocks, the 30 component stocks of the Dow, and what we found was that there were, based on our way of analyzing individual stocks, three of the 30 stocks in strong uptrend patterns — just 10%. And 20 out of the 30 stocks were in well-defined downtrend patterns. So you can see the selectivity that is present there, with 3 of the 30 stocks in uptrends, 20 in well-defined downtrends.
That same type of selectivity is occurring across the broad list [of stocks] as well. Not to the same extent, but it is occurring. And so we think that it is possible that the final highs in the major market averages have not occurred yet, but that a lot of individual stocks have already rolled over into their own bear markets.
Now investors generally don’t buy the market averages, they buy individual stocks. So what we are telling people is that you have got to be watching your own individual stocks at this stage of an old bull market. What you should be doing is holding onto the strongest issues in a portfolio but culling out any stocks that are failing to participate in rallies. So for example, today, an investor ought to be going back through his portfolio and saying, ‘Well, the Dow was up 140 points today, did my stocks participate?’ And if they didn’t, that might be a sign that for that individual stock, the bull market is at or near its end and greater caution should be taken in holding onto to those kinds of stocks."
Be sure to print out both parts!
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Source:
Q&A: Paul Desmond of Lowry’s, Part II
RealMoney.com, 2/19/2006 9:50 AM EST
http://www.thestreet.com/_tscrmb/markets/marketfeatures/10269355.html
For the second time, I ask you, would you please refrain from using the Lord’s name in vain?
It only detracts from your otherwise insightful market commentaries.
If we are going to get a correction into this fall, and everything I watch argues we likely will unless we are going to set some new historical precedence for market action, life will be interesting. Will it be a 2004 slow summer malaise with a few rallies of lower highs until we set a bottom or will be be like 2002 when the market was destroyed for eight months going into October? No one is expecting the latter. No one. It is hard for me to see.
One thing I like to do is compare prior economic and intermarket conditions to corrections of past. Of course, to me 73-74 comes to mind. Any parallels? Well, let’s see.
-The price of oil was at a significant all time high
-Relatively low interest rates that were heading north
-Blue collar America was not participating in the profit boom. A lesson for the greedy SOB’s running some companies now. Your stock options will likely expire worthless unless you create wealth for all of your employees.
-Corporate profits were similar to today
-GM was getting killed. As goes GM, so goes the economy. Oh it’s different this time. NO IT’S NOT! GM and Ford affect the finance industry, transportation, rails, logistics, support industries, services, software, technology, everything. Even small town banks which then affect the cleaning company that cleans the banks after hours. It’s everything.
-International companies were taking our jobs or so we thought. Japan in steel, autos and other manufacturing industries was killing us. China is not the first to impact American workers in globalization.
-Housing? I don’t know. Would be interesting to see but I would expect housing would have been doing well given the low interest rates we started with
Not many of the truly brilliant Wall Street chief strategists or investment officers who have long track records of investing success seem to be thinking any messes of significance. Well, Bernstein at Merrill is very sour. Oh, then there is that guy in the BW poll. What was it? Dow 7000? I discount the perma-bears because they are calling for the market to tank every year. They’ll claim their success as they always do, in their one in a million correct predictions and gain some notoriety.
If we correct this far, it would surely be a crappy event. Because that means we are likely repeating much of the 70s and something really bad is likely going to happen. Recession or true housing mess or GM bankruptcy or something.
Btw, for all of those long lovers, every major average is at a multi-year resistance line or has already hit it and fallen back. Every one sans the Dow 30. It has a hundred points or so to go. The Russell 2000 temporarily broke above and has been hugging the north or south side for weeks. Even the Dow Transports, which are at new highs are at a resistance point going back to 1998. Gonna break through here? Or gonna break down? Will we see a head fake break north? I worry how bad it might get. I’d hate to see the economy crater so I hope this is just a normal mid cycle correction of 15-20%.
What a great article, thanks. Very instructive. It seems to line up pretty well with your prior forecast of an H1 high followed by a serious decline in H2.
BTW I think your writing “voice” is great… please don’t change a thing.
rich
Great work, as always. Certainly dovetails perfectly into the Presidential cycle thesis.
The only thing I wonder about, and I’m not a market pro, is why the whole world isn’t onto us with this 4 year cycle? It’s got such a solid history.
Maybe it’s simply, as you say, too big a cycle for us humans to see easily.
Barry, this was really well-done. Priceless information, and I’m perversely interested in the conversation that it will start (provoke!) on RM. Did anyone else beside me find Paul’s answer regarding his own holdings a little odd? Perhaps it was an omission on his part. Paul states that he is “heavily invested in mid-cap” My expectation is that in the face of an expected correction that one would build a more defensive portfolio–one with more cash/bond positions. On CNBC in the last two weeks, I saw that the CIS for Wachovia Securities (in my hometown!) has moved into 50% cash position. Bravo to him. I think that is telling–and brave since such admissions tend to color folks as “odd” in light of all of the “good” news. One of the most difficult things for me, an individual investor, is that it is often difficult to distill the divergent opinions of “experts”. Developing one’s own personal expertise is time-consuming and mind-numbing at times, not to mention downright scary. Nevertheless, it is one’s personal responsibility, IMV.
Leisa-
If you read a similar article at welling@weeden, you will see that Desmond thinks we are nearing the top, getting on thin ice, but we are not there yet. He doesn’t see a switch to the large caps occuring and hence he is still participating with the mid-caps.
Mark- Thanks for the feedback.
Leisa-
Sure thing! To expand, he sees the top coming in March/April, but that most investors should have culled their laggards by that time and be getting defensive according to their protocols. He sees the decline extending to September/October. 20% or greater. He’s one of the reasons I am 80% cash right now.
Great stuff, Barry. But wouldn’t it be more enlightening to exchange ideas with someone who differs from your basic view? JOKING.
Reading the interview reminds me of why people get trampled evacuating a fire – lack of foresight (justified given the unforseen nature of a fire in a theatre). Greed incents folks to “not get out before the top.” Since “seeing is believing,” folks stay too long instead of getting out while the getting is good. Never be the last to leave a party…cleaning up is no fun.
-45% cash-