WEBVTT - An Interview With Paul Desmond: Masters in Business (Audio) 0:00:03.240 --> 0:00:07.560 This is Masters in Business with Barry Ridholts on Bloomberg Radio. 0:00:08.640 --> 0:00:11.200 This week on the podcast, I have a special guest. 0:00:11.840 --> 0:00:15.760 His name is Paul Desmond. He is the president of 0:00:15.840 --> 0:00:21.920 Lowry's Research and an extremely highly regarded market technician known 0:00:21.960 --> 0:00:26.960 as a technicians technician. And quick funny story about Paul. 0:00:27.360 --> 0:00:30.880 I know him, I don't know fifteen years fourteen years. 0:00:31.040 --> 0:00:35.240 And Paul and I had a conversation a dozen years 0:00:35.320 --> 0:00:41.559 ago that essentially was the forerunner of these podcasts. He 0:00:41.640 --> 0:00:47.840 had just won the Charles Dow Market Technicians Award for 0:00:47.880 --> 0:00:54.120 the most significant uh technical paper looking at bear markets 0:00:54.160 --> 0:00:57.840 and and how bottoms are formed. And I started a 0:00:57.880 --> 0:01:01.400 correspondence with him on email and he got back to 0:01:01.440 --> 0:01:03.520 me and said, oh, that paper was really interesting, but 0:01:03.560 --> 0:01:06.440 now I'm working on this new paper on how market 0:01:06.560 --> 0:01:09.440 tops are formed, and it's really fascinating. We had to 0:01:09.480 --> 0:01:11.840 go back and re create all this data from the 0:01:11.840 --> 0:01:15.200 twenties that didn't exist, and he was just really enthusiastic, 0:01:15.240 --> 0:01:18.120 and so we ended up um through a series of 0:01:18.280 --> 0:01:24.080 phone calls that were recorded and transcribed, created these these 0:01:24.120 --> 0:01:29.120 long conversations which became A Q and A with Paul 0:01:29.160 --> 0:01:32.520 Desmond Part one and two. Originally it ran on the 0:01:32.840 --> 0:01:35.800 On the Street dot com and and now it's a 0:01:35.840 --> 0:01:39.160 little difficult to find there. I know it's buried somewhere 0:01:39.200 --> 0:01:43.000 in there, but I reproduced it on my blog, The 0:01:43.000 --> 0:01:45.800 Big Picture, which is results dot com. I'll put a 0:01:45.880 --> 0:01:50.560 link in uh the page I I do on this 0:01:50.680 --> 0:01:53.920 podcast to those original um Q and A s if 0:01:53.960 --> 0:01:55.680 you want to uh, if you want to see them. 0:01:55.720 --> 0:01:57.560 I actually just reread them the other day and they're 0:01:58.080 --> 0:02:04.280 really really good. But at Conversation was really the first 0:02:04.320 --> 0:02:07.440 time it popped into my head. Hey, I could find 0:02:07.480 --> 0:02:12.120 these really smart guys with really really interesting experiences and 0:02:12.160 --> 0:02:15.400 get them to speak about that, and maybe someone would 0:02:15.520 --> 0:02:18.880 want to pay attention and and and listen to it 0:02:19.360 --> 0:02:23.200 or read it. And um really, Paul Desmond was the 0:02:23.240 --> 0:02:27.680 first Masters in Business we've ever done before we were 0:02:27.680 --> 0:02:30.960 doing radio, by the way, he be. This is a 0:02:31.000 --> 0:02:34.760 long podcast, but he tells some fascinating stories about how 0:02:34.800 --> 0:02:39.560 he met Mr Lowry and and some anecdotes about Joe 0:02:39.600 --> 0:02:42.880 Granville that I find to be hilarious if you know 0:02:42.880 --> 0:02:46.200 who Joe Granville is. But um really an unusual and 0:02:46.280 --> 0:02:50.399 interesting conversation with a lot of of details. If you're 0:02:50.440 --> 0:02:55.720 a technician. If you're a chartist, this is the podcast 0:02:56.240 --> 0:02:59.120 for you. So, without any further ado, here is my 0:02:59.280 --> 0:03:06.880 conversation in with Lowry's Paul Desmond. This is Masters in 0:03:06.960 --> 0:03:11.200 Business with Barry Ridholts on Bloomberg Radio. This week on 0:03:11.400 --> 0:03:15.400 Masters in Business on Bloomberg Radio, my guest is Paul Desmond. 0:03:15.760 --> 0:03:18.280 For those of you who may not know who Paul is. No, 0:03:18.520 --> 0:03:22.679 he is not a member of Dave Brubeck's quartet. He 0:03:22.960 --> 0:03:26.600 is president of Lowry's Research, which is the oldest advisory 0:03:26.639 --> 0:03:30.600 firm in the United States. Paul joined Lowry's as Director 0:03:30.600 --> 0:03:34.160 of Research in nine four, meaning you just had your 0:03:34.160 --> 0:03:39.160 fiftieth anniversary last year. UM. The vast majority of Lowry's 0:03:39.200 --> 0:03:43.720 subscribers or professional investors, including many of the largest hedge 0:03:43.720 --> 0:03:46.880 funds in the world. Paul was the president of the 0:03:46.920 --> 0:03:51.480 Market Technicians Association and the recipients of the Charles H. 0:03:51.640 --> 0:03:56.520 Dow Award given for original and groundbreaking research. And the 0:03:56.560 --> 0:03:59.920 piece that you won that award for was called Identify 0:04:00.200 --> 0:04:03.520 bear market Bottoms and New bull Markets. We'll talk about 0:04:03.600 --> 0:04:06.960 that a little while, um. Speaking of bear market bottoms. 0:04:07.000 --> 0:04:10.240 In two thousand nine, you were honored by the Technical 0:04:10.760 --> 0:04:13.360 and you were honored as Technical Analysts of the Year 0:04:13.400 --> 0:04:17.720 by Technical Analysts magazine. Bull Desmond, Welcome to Bloomberg. Thank 0:04:17.760 --> 0:04:21.520 you very much. I'm delighted to be here. So people 0:04:21.640 --> 0:04:24.960 who um are not in the industry may not have 0:04:25.160 --> 0:04:28.760 heard of you, but I found you a long time 0:04:28.800 --> 0:04:32.680 ago when you had won that Dow Award for that paper, 0:04:32.720 --> 0:04:35.360 and you and I actually had, I want to say, 0:04:35.360 --> 0:04:39.560 it's about a dozen years ago, an extensive conversation about 0:04:39.800 --> 0:04:43.560 how market bottoms are formed. And at the time a 0:04:43.640 --> 0:04:46.320 paper you were working on which was called how Market 0:04:46.360 --> 0:04:49.039 Tops Are Formed, and we I ended up writing that 0:04:49.120 --> 0:04:52.360 up that got published. It's actually still on the block side. 0:04:52.400 --> 0:04:55.760 If anyone wants to read this one from oh four 0:04:56.000 --> 0:04:58.520 or five something like that, it's called uh it just 0:04:58.520 --> 0:05:00.520 searched for Riholts and Desmond and that will come up. 0:05:00.800 --> 0:05:04.520 And that's a really a fascinating conversation. Um, but let's 0:05:04.560 --> 0:05:08.000 jump right into this. What did you do before you 0:05:08.040 --> 0:05:13.200 were working at Lowry's. I was in the army, So 0:05:13.240 --> 0:05:16.200 I went from college to the Army to Lowry just 0:05:16.320 --> 0:05:18.840 like that. Yeah, I've got the shortest resume animals. There 0:05:18.839 --> 0:05:22.360 you go one job years. That's that's a little unusual. 0:05:22.720 --> 0:05:25.719 So that naturally leads to the next question, which is, 0:05:26.160 --> 0:05:29.920 how did you become a technician right out of the army? Well, 0:05:30.000 --> 0:05:33.840 I my my my father was an investor of some 0:05:33.960 --> 0:05:37.800 size and UH and suffered a series of heart attacks 0:05:37.839 --> 0:05:42.760 and and UH couldn't handle the portfolio anymore, and so 0:05:42.880 --> 0:05:47.599 I took over for a short term, short time, and 0:05:47.600 --> 0:05:50.000 and I knew nothing about what I was doing. So 0:05:50.040 --> 0:05:51.920 I spent a great deal of time at the public 0:05:51.960 --> 0:05:55.480 library trying to try to figure out what made sense 0:05:56.279 --> 0:05:59.800 and would you learn? In the library, I saw a 0:06:00.080 --> 0:06:03.240 lot of things that did not work, that I did 0:06:03.240 --> 0:06:06.599 not enjoy or did not feel what it was the 0:06:06.680 --> 0:06:09.360 right way to go. But but I did run into 0:06:10.040 --> 0:06:13.480 I had. I had a major economics in college, and 0:06:13.560 --> 0:06:16.440 so I was very familiar with the laws supply and demand, 0:06:16.600 --> 0:06:19.880 and believed in the law supplying the man very much. 0:06:20.040 --> 0:06:24.720 And I started looking for things that fit along with 0:06:24.760 --> 0:06:27.800 the law supplying the man. Finally got down to the 0:06:27.839 --> 0:06:30.600 point where I was doing some point in figure charting. 0:06:31.600 --> 0:06:35.400 I was looking at value line and then all of 0:06:35.480 --> 0:06:38.920 a sudden I ran across the lowry material. And I 0:06:39.000 --> 0:06:42.159 was in the Miami Library at the time, and saw 0:06:42.240 --> 0:06:48.680 that the Lowry's had a Miami address, and so so 0:06:49.120 --> 0:06:52.559 I read a lot of their material and and felt 0:06:52.680 --> 0:06:55.680 this was exactly what I was looking for because it 0:06:55.720 --> 0:06:58.440 was based on the law of supplying demand. So how 0:06:58.440 --> 0:07:04.000 do you go from research markets to manager Dad's portfolio 0:07:04.480 --> 0:07:07.560 to applying for the job as had of research. I 0:07:07.640 --> 0:07:10.520 really wasn't applying for the job. I was trying to 0:07:10.600 --> 0:07:14.320 learn more about the stock market, and so with the 0:07:14.360 --> 0:07:17.120 Miami address, I thought, well, this is a chance to 0:07:17.360 --> 0:07:19.920 just go over there and maybe get a chance to 0:07:20.000 --> 0:07:23.280 learn more. Serendipitous right there, Yes, I was, I was 0:07:23.280 --> 0:07:26.480 put together. I went over to the address that was 0:07:26.560 --> 0:07:29.280 on the reports, and instead of an office building, what 0:07:29.360 --> 0:07:34.160 I found was I was. I was in the State 0:07:34.280 --> 0:07:40.360 area of Miami and right along the Brickle Avenue estates 0:07:40.640 --> 0:07:45.680 and I got to a gate. UH went through the 0:07:45.720 --> 0:07:49.760 gate and at the at the end of the property 0:07:49.960 --> 0:07:56.000 was three or four story brick colonial homes, incredibly unusual 0:07:56.040 --> 0:08:01.240 in Miami, and Uh, I pulled over. They had a 0:08:01.320 --> 0:08:08.920 separate garage and I guess mads quarters. And I pulled 0:08:09.000 --> 0:08:12.080 in there and there was a there was a man 0:08:12.440 --> 0:08:16.360 in the bushes tending to the flowers, and I said 0:08:17.400 --> 0:08:19.560 I said to him, is there anybody around here from 0:08:19.600 --> 0:08:23.800 the Lowry organization? This is actually on a Saturday. And 0:08:23.880 --> 0:08:25.920 he came up out of the bushes with an old 0:08:26.840 --> 0:08:29.679 head on, you know, dirt all over his fingernails, and said, 0:08:30.160 --> 0:08:32.360 I think we can find somebody around here. And his 0:08:32.440 --> 0:08:37.679 name was L. M. Lowry, the founder of Larry Research. 0:08:37.800 --> 0:08:41.200 And so we we went into actually the major quarters 0:08:41.200 --> 0:08:45.000 have been converted into his private office and so we 0:08:45.040 --> 0:08:48.280 sat went in and sat down and I just said, 0:08:48.480 --> 0:08:51.040 you know, I've seen your material in the library and 0:08:51.160 --> 0:08:54.480 like to learn more about it. And we sat and 0:08:54.520 --> 0:08:57.800 talked for oh, I think three hours. The first time 0:08:57.840 --> 0:09:00.640 you're meeting him, just come on into my lair and 0:09:00.679 --> 0:09:03.920 talk to me. Yeah. I always thought in college that 0:09:03.960 --> 0:09:06.160 there must be some place in the world that you 0:09:06.160 --> 0:09:09.400 could go to get a master's degree or PhD in 0:09:09.640 --> 0:09:14.160 stock market analysis, and I think this is it. And 0:09:14.200 --> 0:09:16.959 he said, well you can learn you know, I think 0:09:17.360 --> 0:09:21.240 I think you can learn a few things here. And um, 0:09:21.440 --> 0:09:24.400 did he offer you a job? Well, yeah, sort of 0:09:24.559 --> 0:09:29.040 sort of a sort of a job at a phenominal 0:09:29.800 --> 0:09:33.880 again as an intern it was almost almost an internship. 0:09:34.080 --> 0:09:38.040 Is this is masters in business on Bloomberg Radio. I'm 0:09:38.120 --> 0:09:41.360 Barry Ridholtz. My guest this week on Masters in Business 0:09:41.480 --> 0:09:45.720 is technical analyst Paul Desmond of Lowry's. You've been called 0:09:45.800 --> 0:09:50.320 the technicians technician, which is a term I I really like. 0:09:50.880 --> 0:09:53.559 Before we start talking about market bottoms, I have to 0:09:53.559 --> 0:09:57.280 ask one question, which is a quote of yours. You said, 0:09:57.880 --> 0:10:02.160 if you're looking at fundamentals, you're already too late. Explain 0:10:02.200 --> 0:10:06.000 what you meant by that, Well, the fundamentals are are delayed. 0:10:06.640 --> 0:10:09.320 People buy and sell stocks not because of what they 0:10:09.400 --> 0:10:13.360 know today, but what they think is going to happen 0:10:13.400 --> 0:10:16.640 in the future. So they look at today's or rings 0:10:16.720 --> 0:10:19.360 reports and they say, I can see the ear rings 0:10:19.440 --> 0:10:23.120 are positive now, but I just don't think they're going 0:10:23.160 --> 0:10:25.800 to be that positive six months from now, and therefore 0:10:25.800 --> 0:10:29.000 the market starts to turn down because of that change 0:10:29.040 --> 0:10:35.520 in psychology, and um the ear rings reports are still positive, 0:10:35.600 --> 0:10:37.880 but the but the market turns out the same thing. 0:10:37.920 --> 0:10:42.840 At market bottoms, the market traditionally turns up because investors 0:10:42.840 --> 0:10:45.439 are saying, yeah, I can see how bad things are 0:10:45.559 --> 0:10:48.280 right now, but I think in the next six months 0:10:48.320 --> 0:10:50.400 things are going to get better. So so let's talk 0:10:50.440 --> 0:10:53.640 a little bit about that. Let's talk about market bottoms. 0:10:53.720 --> 0:10:56.800 This is the piece that you won the Charles Dowe 0:10:56.880 --> 0:11:00.640 Award for um how how bare market bought ms are made. 0:11:01.200 --> 0:11:03.240 Let's talk a little bit about the oh seven o 0:11:03.480 --> 0:11:08.200 nine financial crisis and market bottom. How did that compare 0:11:08.280 --> 0:11:11.160 to prior bear markets? Was that typical or was that 0:11:11.240 --> 0:11:15.600 an a typical bottom? No, it was it was rather 0:11:16.080 --> 0:11:23.640 rather typical bottom. We we we saw. The conditions that 0:11:23.679 --> 0:11:28.280 are necessary for a bottom are twofold number number one. 0:11:28.400 --> 0:11:34.800 You have to see the the selling exhausted. In other words, 0:11:34.920 --> 0:11:38.480 people have to capitulate, dump stock and just give up exactly. 0:11:38.520 --> 0:11:41.160 You have. It has to reach the point where people say, 0:11:41.240 --> 0:11:43.040 just get me out of the stock market. I don't 0:11:43.080 --> 0:11:45.240 ever want to see his stock again in my life. 0:11:46.000 --> 0:11:49.839 And at that point there's no more sellers to drive 0:11:49.960 --> 0:11:55.719 prices down. That's what you mean by exhausting, exhausted exactly. Now. 0:11:55.760 --> 0:11:58.120 The second part of it which has to be there 0:11:59.200 --> 0:12:02.680 is uh that the buyers who are sitting on the 0:12:02.720 --> 0:12:06.679 sidelines have to look at the bargains that are available 0:12:06.720 --> 0:12:09.880 at that point and say, boy, this is an opportunity 0:12:09.920 --> 0:12:13.000 that I haven't seen in a dozen years, and they 0:12:13.040 --> 0:12:16.360 come running back in with great enthusiasm to grab up 0:12:16.360 --> 0:12:19.600 all these bargains. So it's a one two punch. You 0:12:19.679 --> 0:12:22.800 have to exhaust the sellers and then you have to 0:12:22.840 --> 0:12:25.960 bring the bring the buyers back in again. That's interesting 0:12:26.000 --> 0:12:30.920 that simultaneously you have the psychology of some people I'm 0:12:30.920 --> 0:12:34.280 going to describe it as reacting emotionally, Hey, just make 0:12:34.320 --> 0:12:37.400 the pain stop, do whatever you have to do, versus 0:12:37.480 --> 0:12:41.240 the more objective, value oriented people who say, well, it 0:12:41.280 --> 0:12:43.920 may feel terrible, but look how reasonable these things are. 0:12:44.080 --> 0:12:47.280 That's right. And what you find generally is that the 0:12:48.320 --> 0:12:52.880 average investor is panicking right at the bottom. They're saying, 0:12:52.880 --> 0:12:54.720 oh my goodness, I you know, I have to sell 0:12:54.800 --> 0:12:57.920 now because I'm gonna lose. If I don't, I'm gonna 0:12:57.920 --> 0:13:00.520 lose everything I've got. I remember, and we were at 0:13:00.559 --> 0:13:06.240 Dow or so during the O nine bottom, and all 0:13:06.320 --> 0:13:08.240 of a sudden, out of the woodworks, we were getting 0:13:08.280 --> 0:13:12.880 forecast for Dow five thousand, Dow three thousand, Dow one thousand, 0:13:13.000 --> 0:13:16.400 and that sort of background noise I think really scared 0:13:16.480 --> 0:13:19.640 the living daylights out of people. Absolutely did. And and 0:13:19.679 --> 0:13:23.360 that those are the conditions that typically invest occur at 0:13:23.520 --> 0:13:26.360 a market bottom. So let's talk a little bit about 0:13:26.360 --> 0:13:30.319 that bottom in your um white paper that won the 0:13:30.400 --> 0:13:36.600 dowt Ward. You talk about down days and days. Describe 0:13:36.679 --> 0:13:39.600 what that is and tell us what it means. Well, 0:13:39.400 --> 0:13:42.280 we were looking for some way to to to to 0:13:43.240 --> 0:13:47.520 indicate that we reached a market bottom, and a lot 0:13:47.559 --> 0:13:52.320 of writers have talked about capitulation and uh and in 0:13:52.360 --> 0:13:56.079 a in a very vague general sense, but nobody had 0:13:56.120 --> 0:13:59.920 come up with a way to specifically identify the kind 0:14:00.120 --> 0:14:03.200 capitulation that occurs at market bottoms. So we went back 0:14:03.240 --> 0:14:05.840 and looked at the amount of volume that was traded 0:14:06.880 --> 0:14:10.160 on the downside during periods of the market decline. And 0:14:10.240 --> 0:14:12.920 there's the sellers volume, how much how much of the 0:14:13.040 --> 0:14:15.679 volume was due to sellers and how much of it 0:14:15.720 --> 0:14:19.080 was due to buyers? And what we found that when 0:14:19.080 --> 0:14:23.600 you get into the point where investors are panicking, uh 0:14:24.840 --> 0:14:27.440 or more of all of the volume traded on the 0:14:27.480 --> 0:14:30.880 market that day is traded on the downside, meaning it's 0:14:30.920 --> 0:14:33.680 at a price lower than the previous price. Exactly, because 0:14:33.760 --> 0:14:36.200 whenever I've brought this up to people, one of the 0:14:36.200 --> 0:14:38.520 comments I often hear is, well, what do you mean 0:14:38.600 --> 0:14:41.560 more sellers and buyers? Every share that's sold someone's buying 0:14:41.560 --> 0:14:44.080 it shouldn't there be an equal amount. But you're really 0:14:44.120 --> 0:14:48.640 talking about are these shares sold um sold lower or 0:14:48.640 --> 0:14:51.360 are they bought higher? Yeah? Yeah, which you have to 0:14:51.400 --> 0:14:54.120 look at. The stock market is a double auction system 0:14:54.320 --> 0:14:58.040 where the buyers can raise or lower their prices and 0:14:58.080 --> 0:15:02.040 the sellers can lower or raise their prices. And so 0:15:02.160 --> 0:15:06.400 what you're constantly watching for is to say, um is 0:15:06.440 --> 0:15:12.720 the mood of investors towards selling more than towards buying. Uh. 0:15:12.880 --> 0:15:16.440 So there's always a buyer, always a seller. But the 0:15:16.560 --> 0:15:19.200 question is who is the most anxious to do business, 0:15:19.280 --> 0:15:23.680 who's driving the actions. If the seller is anxious, then 0:15:23.720 --> 0:15:27.280 the price will go down. If the buyer is anxious, 0:15:27.320 --> 0:15:29.120 the only way he's going to get that stock away 0:15:29.160 --> 0:15:31.440 from the seller is to raise the price. So it's 0:15:31.480 --> 0:15:34.640 who's impatience and just wants either in or out at 0:15:34.640 --> 0:15:37.360 that moment's right, and and at the at these at 0:15:37.560 --> 0:15:41.680 near these major market bottoms, the impatience is all on 0:15:41.720 --> 0:15:43.880 the downside. Just get me out of this place. I 0:15:43.920 --> 0:15:45.880 don't I don't want to ever see a stock again. 0:15:46.160 --> 0:15:50.720 So we talked about down days when the vast majority 0:15:50.760 --> 0:15:54.400 of the trading volume is to the downside, but surprisingly 0:15:54.640 --> 0:15:58.000 right around bottoms you also end up, as you've written, 0:15:58.440 --> 0:16:02.240 with an update, explain what happens. You don't always and 0:16:02.280 --> 0:16:05.640 that's the that's the important point is you can have 0:16:05.680 --> 0:16:09.320 a series of these ninety percent downside days where investors 0:16:09.360 --> 0:16:12.440 are are panicking, but the buyers are sitting on the 0:16:12.480 --> 0:16:16.520 sidelines saying, you know, prices just don't look that good 0:16:16.520 --> 0:16:19.600 to me. I really can't get too enthusiastic about buying here. 0:16:20.360 --> 0:16:24.920 If that, if that's the way they view the bargain prices, 0:16:25.000 --> 0:16:28.280 that there will be more sellers, there will be more 0:16:29.160 --> 0:16:33.160 downside days, and so you don't you can't just view 0:16:33.240 --> 0:16:37.520 the selling as being the key to the market bottom. 0:16:37.640 --> 0:16:39.920 It's it's a one two punch of you need to 0:16:39.920 --> 0:16:43.080 see the sellers panic and then you need to see 0:16:43.120 --> 0:16:45.440 the buyers come rushing back in. If the buyers won't 0:16:45.480 --> 0:16:48.560 rush back any and then the market decline will continue 0:16:49.080 --> 0:16:52.360 until prices eventually reach the point where the buyers are 0:16:52.400 --> 0:16:55.240 really enthusiastic about coming back into the mark. And that's 0:16:55.240 --> 0:16:59.320 when we get that's what is upside day so and 0:16:59.400 --> 0:17:03.080 others in nineties, in the nineteen seventy nine seventy four 0:17:03.120 --> 0:17:09.679 market decline. We saw sixteen downside days without ever seeing 0:17:09.680 --> 0:17:12.440 and until we finally saw a ninety percent ups a day. 0:17:12.440 --> 0:17:15.760 And what year was that? When seventy three and nineteen 0:17:15.800 --> 0:17:19.520 seventy four was two year two year bear market? Amazing. 0:17:19.680 --> 0:17:23.680 This is Masters in Business on Bloomberg Radio. I'm Barry Ridalts. 0:17:23.960 --> 0:17:27.320 Our guest this week on Masters in Business is Paul Desmond, 0:17:27.640 --> 0:17:31.560 President of Lowry's and a gentleman known as a technicians 0:17:31.600 --> 0:17:36.520 technician UH, an award winning analyst of stock market history. 0:17:36.680 --> 0:17:40.800 Let's talk a little bit about a fairly interesting problem 0:17:40.880 --> 0:17:42.840 which I think a lot of people are unaware of, 0:17:43.320 --> 0:17:48.640 and that's what happens when we market cap weight various industries. 0:17:48.720 --> 0:17:51.760 The SMP five hundred is cap weighted, many of the 0:17:51.760 --> 0:17:56.440 other industries are also. Other indusicries are also cap weighted. 0:17:57.280 --> 0:17:59.840 What you've been critical about this, what's the problem with 0:18:00.119 --> 0:18:03.920 cap waiting market in disease, well, particularly in particularly in 0:18:04.080 --> 0:18:10.360 old bull markets, the camp being late in the cycle, 0:18:10.560 --> 0:18:16.080 not not not nineteenth century bull markets liked or something 0:18:16.119 --> 0:18:19.480 along those lines, and where you're transitioning from from an 0:18:19.520 --> 0:18:24.320 old bull market into a bearer market in that period, 0:18:24.840 --> 0:18:33.080 the big cap price indexes are incredibly deceptive, and we're 0:18:33.080 --> 0:18:36.240 in that kind of stage right now in two thousand 0:18:36.320 --> 0:18:39.400 and fifteen. This is now an old six years old 0:18:39.400 --> 0:18:42.040 bull market exactly. And what what you're seeing is that 0:18:42.840 --> 0:18:47.159 is that the small camp segment of the market was 0:18:47.240 --> 0:18:51.160 the first part to begin to turn down, most sensitive 0:18:51.200 --> 0:18:55.000 to economic conditions, or just the first thing that sellers 0:18:55.040 --> 0:18:57.800 started dump. Well, I think they're the most speculative stocks 0:18:57.840 --> 0:19:01.080 that they tend to be overpriced more than more than 0:19:01.160 --> 0:19:07.600 most stocks. They're they're the the most uh a liquid, 0:19:08.480 --> 0:19:12.680 least amount of coverage, not much about there. They're kind 0:19:12.680 --> 0:19:15.760 of one trick ponies. If if, if there, if their 0:19:15.760 --> 0:19:19.160 companies don't if their company's product does not do well, 0:19:19.240 --> 0:19:22.479 that you know they're pretty much gone. So anyway, what 0:19:22.520 --> 0:19:27.400 we've seen is that the market does not always move 0:19:27.480 --> 0:19:31.640 in tandem and knows it's not a single entity. It's 0:19:31.680 --> 0:19:36.800 a series of of areas of strength and weakness. And 0:19:36.880 --> 0:19:40.679 so the first stage of of a transition from a 0:19:40.720 --> 0:19:44.360 bowl market to a bearer market is weakness in small caps. 0:19:45.040 --> 0:19:48.320 Then at the later point, maybe several months later, you 0:19:48.520 --> 0:19:51.600 see the deteriorations start to occur in the mid cap stocks. 0:19:52.280 --> 0:19:55.200 And then later than that it occurs in the big 0:19:55.240 --> 0:19:58.639 cap stocks. So if you're watching the big cap indexes 0:19:58.720 --> 0:20:03.320 like the SMP five index, you're missing out on all 0:20:03.440 --> 0:20:07.639 the weakness that has already occurred in the um, in 0:20:07.680 --> 0:20:10.400 the small cap, in the mid cap and Nicklas. Example, 0:20:11.040 --> 0:20:14.360 at the top on the top day in two thousand, 0:20:14.520 --> 0:20:19.159 which I think was January twelve, or this is the 0:20:19.320 --> 0:20:22.280 this is the absolute top day of the of the 0:20:22.400 --> 0:20:26.879 SMP five index. If you look to inter inside the market, 0:20:26.920 --> 0:20:29.960 you'd see the fifty five percent of all of the 0:20:30.040 --> 0:20:32.920 stocks listed on the New York Stock is Change were 0:20:33.000 --> 0:20:36.880 already down by twenty or more from there from their high. 0:20:37.040 --> 0:20:39.159 So more than more than half of the index is 0:20:39.200 --> 0:20:42.199 already in a bullmarket. Yeah, but you can't tell that 0:20:42.240 --> 0:20:45.840 because the leaders are still going higher. Absolutely, because the 0:20:45.840 --> 0:20:48.639 big caps are the last thing to turn down, and 0:20:48.680 --> 0:20:51.960 therefore they hide all of the weaknesses occurring in the 0:20:52.040 --> 0:20:54.959 small cap and mid cap stop. So we saw that 0:20:55.040 --> 0:20:58.399 in two thousand with what people called the Horsemen of 0:20:58.520 --> 0:21:02.760 the Technology index. We saw that in the late sixties 0:21:02.840 --> 0:21:05.840 or mid sixties, we had a twenty year bull market 0:21:06.040 --> 0:21:10.280 after the World War two ended, and that narrowed to 0:21:10.359 --> 0:21:13.840 the nifty fifty similar concept. Those were the best known 0:21:13.880 --> 0:21:16.840 biggest gap stocks. Yeah, that wasn't That was in seventy, 0:21:17.280 --> 0:21:21.560 seventy two and seventy three, so really forty years into uh, 0:21:21.720 --> 0:21:24.879 twenty years into a huge post war rally. Yeah, and 0:21:25.359 --> 0:21:29.200 you and you see other You see other situations in 0:21:29.240 --> 0:21:33.399 which a part portion of the market is going in 0:21:33.480 --> 0:21:36.000 one direction and a portion of the market is going 0:21:36.040 --> 0:21:40.240 in another direction. For example, in seventy seven, the Dow 0:21:40.400 --> 0:21:44.080 Jones Industrial Average was down almost all year long. They 0:21:44.200 --> 0:21:49.119 was down from his highs. At the same time, the 0:21:49.200 --> 0:21:52.600 small caps and mid caps were making new bull market highs. 0:21:53.320 --> 0:21:57.520 You saw the same pattern in two thousand. Actually, what 0:21:57.680 --> 0:22:00.760 was happening in two thousand was the technology stocks were 0:22:00.800 --> 0:22:05.880 extremely weak. They were probably down. The big caps were 0:22:05.920 --> 0:22:10.080 down maybe thirty five, and the mid caps and small 0:22:10.160 --> 0:22:15.439 caps we're making new highs. The SMP mid cap and 0:22:15.480 --> 0:22:21.280 the SMP small cap indexes made their highs in UM 0:22:21.359 --> 0:22:26.720 April of two thousand two. Most people say, well, the 0:22:26.760 --> 0:22:30.000 bear markets started in early two thousand and lasted until 0:22:30.119 --> 0:22:35.399 March of two thousand three. UM. But first big for 0:22:35.520 --> 0:22:38.720 mid caps and small caps, they were actually going in 0:22:38.760 --> 0:22:43.280 the opposite direction from the big caps. Again, if an 0:22:43.280 --> 0:22:48.000 investor can't couldn't see that that condition, they missed a 0:22:48.160 --> 0:22:52.600 huge opportunity. This is Masters in Business on Bloomberg Radio. 0:22:52.800 --> 0:22:57.159 I'm Barry Ridholtz. We're speaking with Paul Desmond, technical analysts 0:22:57.240 --> 0:23:02.040 at Lowry's also president, and he has been either working 0:23:02.080 --> 0:23:07.240 there or running the place since nineteen sixt you. Um, 0:23:07.400 --> 0:23:09.880 last time we spoke, you were working on a paper 0:23:10.119 --> 0:23:14.080 about how market tops were formed. What you subsequently put 0:23:14.080 --> 0:23:17.920 out and has become a widely acclaimed piece of research. 0:23:18.800 --> 0:23:22.360 Let's talk about a data point that I pulled from 0:23:22.400 --> 0:23:26.560 your research that I find absolutely fascinating. Of the fourteen 0:23:26.680 --> 0:23:31.760 major market tops from ninety nine to two thousand, the 0:23:31.840 --> 0:23:35.359 average percentage of stocks making new highs for the day 0:23:36.160 --> 0:23:40.360 was only six percent. Explain how that happens and and 0:23:40.400 --> 0:23:46.520 what that means? Well, uh uh what? What? What occurs 0:23:46.640 --> 0:23:51.040 is that in the past, people used to think of 0:23:51.080 --> 0:23:55.240 the market as a single entity. The market goes up 0:23:55.400 --> 0:23:59.760 and it goes down, all in unison, that that stocks 0:24:00.040 --> 0:24:05.000 moved together. That's true at market bottoms, but it's far 0:24:05.160 --> 0:24:08.960 from true at market tops. Market tops are very much 0:24:09.040 --> 0:24:13.080 like the autumn season, which is what we are right 0:24:13.119 --> 0:24:17.800 in the middle of now. And and in the autumn, 0:24:18.280 --> 0:24:21.760 what's happening is the leaves are changing color, and everybody's saying, oh, 0:24:21.920 --> 0:24:24.879 isn't that isn't that beautiful? But the if the leaves 0:24:24.920 --> 0:24:28.399 could talk, they'd be screaming out to you saying, winner's coming, 0:24:28.480 --> 0:24:32.359 winner's coming, winners coming. You better get prepared because winners coming. 0:24:33.000 --> 0:24:35.119 And nobody's paying any sense to it, all say, oh, 0:24:35.160 --> 0:24:39.119 are there the leaves? Pretty well, the same thing happens 0:24:39.160 --> 0:24:42.720 in the stock market is that individual stocks drop out 0:24:42.760 --> 0:24:46.440 of the bull market one by one by one, very 0:24:46.480 --> 0:24:49.800 much like the leaves falling off the trees. That the 0:24:49.840 --> 0:24:54.520 process starts with the small caps. Almost always starts with 0:24:54.600 --> 0:24:59.080 the small caps. Then it moves to the mid caps. Uh. 0:24:59.119 --> 0:25:01.800 In those are area is the few people are looking at. 0:25:02.320 --> 0:25:04.160 You know, if you said, when was the last time 0:25:04.160 --> 0:25:07.400 you saw open the paper or a magazine and saw 0:25:07.480 --> 0:25:12.080 a picture of the chart of the small cap Price INDEXUS, 0:25:12.160 --> 0:25:14.480 it's you never see it. You see the SMP five. 0:25:15.800 --> 0:25:21.240 So so those are stocks that you don't even know exists. Um, 0:25:21.320 --> 0:25:24.080 so they start to roll over. First, they're the first 0:25:24.160 --> 0:25:26.840 leaves to fall off the trees. Then the mid caps 0:25:26.840 --> 0:25:29.720 start to fall off the trees. And that process is 0:25:29.760 --> 0:25:32.399 all taking place while the s m P five hundred 0:25:32.520 --> 0:25:36.679 is still in a rising pattern, because the big caps 0:25:36.720 --> 0:25:40.000 are the last thing to turn down. So the what 0:25:40.160 --> 0:25:45.400