How To Take The Market's Temperature

Here is a look at conventional wisdom regarding the need to call a market top. I heard an interview on Financial Sense a few months ago and took a few notes and never got around to sharing the information and I wanted to take an opportunity to do so.

“The focus on tops is that it's more of a process, it's not a single event, and it's best related to the seasons of nature.”

~Paul Desmond (market technician, president of Lowry's Research)

Question: Desmond proposed at a conference was:

“What percentage of stocks would be topping out when the actual peak of the market happened?

Answer:  Only 6% of the stocks are hitting new record highs at a market peak. The market becomes more concentrated and selective and less stocks are hitting new highs. Of the 14 major market tops, between 1929 and 2000, inclusive, when the Dow Jones Industrial Average reached its absolute peak, the average percentage of stocks also making new highs on that day was 5.98%. At the time of that article on Financial Sense we were in the  Summer Season.

• Spring – Small number, but increasing number of stocks above their 200 day moving average.
• Summer – Large number of stocks above their 200 day moving average.
• Fall - Small number, but decreasing number of stocks below their 200 day moving average.
• Winter - Large number of stocks below their 200 day moving average.

The analogy to the changing seasons is very applicable to the stock market: strong market breadth is akin to summer, weakening market breadth to fall, very poor market breadth to winter, and improving market breadth similar to spring. By analyzing this process in multiple layers we can make informed investment decisions about market trends. ~ Paul Desmond

Nearly three months have passed since the time of that article and it may be a good thing that I waited to recap the article because it's looking more and more like a significant top may be in on the general markets.  Currently my timing signal is and has been on a sell signal since early May and if the markets don't stage a serious rally soon that takes us back above previous highs then I view the last 3 months of market action as very bearish.

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