Investor Profile: Master market timer Desmond sees more woes
biz.yahoo.com
Tuesday August 27, 4:45 pm ET
By Haitham Haddadin
NEW YORK, Aug 27 (Reuters) - Master stock market timer Paul Desmond warned clients to get out of stocks ahead of the October 1987 crash. More recently he proclaimed, also correctly, that stocks would carve out new lows this year.
Market timing, as Wall Street lore goes, is a futile exercise for individual investors. But such prescient calls have earned a strong following for Desmond, president of the Florida-based Lowry's Reports Inc., the 64-year-old market timing service that boasts a top notch client list.
As a technical analyst, Desmond studies stock prices and trade volumes. But he looks beyond popular averages into sectors and the strength of advancing and declining stocks, churning out daily, weekly and monthly reports on when to buy and sell.
Now, answering the million-dollar question on Wall Street, the pundit argues that the bear market that began in early 2000 is yet to hit its lows, despite the already severe declines.
"We never saw the kind of climactic selling in July we typically see at major market bottoms," said Desmond, who keeps track of upside and downside volume statistics, points gained and lost, breadth and momentum before issuing recommendations.
Desmond went out on a limb this spring when he argued in a report that the autumn 2001 three-year lows carved out in the wake of the Sept. 11 terror attacks were not the bottom. Indeed, stocks plunged even lower in July as wilting corporate profits and news of accounting shenanigans took a toll.
But even before the plunge, the solid analysis "Identifying bear market bottoms and new bull markets" in May earned Desmond the "Charles Dow Award of 2002", for best research paper. The award is named for the journalist who created the Dow Jones industrial average in 1896 and co-founded Dow Jones & Co. (NYSE:DJ - News), publisher of The Wall Street Journal and Barron's.
The award was presented at the annual gathering of the Market Technicians Association (MTA), the national grouping of technical analysts. Desmond headed MTA between 1997 and 1999.
"He has done very good work in differentiating between what we associate with the market, the popular averages, and what is really moving the market," said MTA treasurer Richard Dickson, chief technical strategist with Hilliard Lyons in Kentucky.
EARLY ENCOUNTERS OF THE GRIZZLY KIND
Desmond's conservative style has roots in a very early education in the ravages market grizzlies can inflict.
Years ago, when Desmond was a Florida State University senior studying finance, he suddenly found himself custodian of his family's multimillion-dollar portfolio. His father suffered a series of strokes, and Desmond was entrusted with the portfolio packed with blue chips such as the Radio Corporation of America (RCA) as a market downswing was underway in 1962.
The novice investor made no money, but saved the family fortune by staying out of the market until the bottom in 1966.
By then, Desmond was stock picker for an investment club of a dozen college buddies who put up $25,000 each. He made a killing with picks like computer firm Control Data Corp.
"When you have seen a number of bear markets and the destruction that can occur to portfolios, you are able to change your strategy as the market changes," says Desmond, now silver-haired and much wiser at 62. "It makes you aware that you simply cannot just 'buy and hold'."
Desmond joined Lowry's Reports in 1964 as an apprentice and was taught by company founder, the late L.M. Lowry, who is recognized as one of the masters of technical analysis.
Desmond still vividly recalls the first time he arrived at the impressive three-story colonial Miami villa surrounded by palm trees that once housed the Lowry's Reports business.
"I thought -- if I go in, I'll be arrested," he told Reuters. But he had nothing to fear. The legendary Lowry took him under his wing.
"I offered to work for him for nothing. I just wanted to learn," says Desmond, who in 1972 bought the firm now based in North Palm Beach. "He agreed to hire me, almost for nothing!"
Now Desmond charges individuals up to $425 a week for the reports disseminated by e-mail, fax and express mail while institutional clients dish out a hefty $12,000 a year.
The fees match the company's sterling reputation. Desmond beams at rave reviews such as one from Money Magazine that called it the "Rolls-Royce of timing services."
"Paul is one of the great long-time market observers," said Ken Tower, chief technician at Charles Schwab unit CyberTrader Inc, a long-time subscriber.
BOTTOM SIGNS MISSING
In 1987, Desmond told clients to get out of stocks days ahead of the Oct. 19 crash after seeing "a series of indicators showing failing demand and increasing supply," he said.
More recently, after the lows in September, he issued a buy signal, just as a powerful rally ensued. And, on May 10, 2002, he warned clients in his reports to "go into heavily defensive positions" ahead of the latest market plunge.
In March he warned investors not to rush into illiquid small and mid-cap stocks that were on a tear. The Russell 2000 index of small-cap stocks (CBOE:^RUT - News) sank 30 percent to about 350.
Recently, he recommended sectors like alcohol and tobacco. Among stocks, he says he favored brewer Anheuser Busch (NYSE:BUD - News), which has rallied from $44 at the July lows to over $53, and UST Inc. (NYSE:UST - News) parent of U.S. Smokeless Tobacco, which rose to $34 from $27. He warned that the real estate sector was topping and named stocks like Alexanders Inc. (NYSE:ALX - News) and American Real Estate Partners, (NYSE:ACP - News) which have since fallen.
Since the July lows, the Street regained some lost ground.
But hold the bubbly, cautions Desmond, who believes key ingredients that define a major bottom still are missing.
Two indicators he uses -- 90 percent Upside and 90 percent Downside Days -- still point to lack of a definite low.
On a 90 percent Upside Day, points gained equal 90 percent or more of points gained plus points lost, and upside volume equals 90 percent or more of the sum of upside plus downside volume. This is the "panic buying" out of which bull markets are born and the reverse of this is a 90 percent Downside Day, which means "panic selling".
The selling after Sept. 11 never reached the panic proportions needed to weed out sellers and pave the way for sustained demand. Not one 90 percent Down Day was recorded. The same applies for the latest plunge.
Desmond's data show there were 14 such 90 percent Down Days in the New York Stock Exchange during the severe 1973-74 bear market. In the current, he spotted only two, in the spring of 2001, while a typical bear market has 5 such days.
Also, Desmond says stocks still are overpriced by historical standards. The price-earnings ratio for the S&P stocks, at 21 times earnings in July, was almost twice as high as the ratio of 11 typically seen at major market bottoms.
"This tells you there is more downside," he says. |
