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Q&A: Paul Desmond of Lowry's Reports

What we found was that the currency conversions created an incredibly complicated system for investors to keep track of. In other words, there were many cases in which you might have bought into a foreign market and made money in the market but when you tried to bring the currency back into our markets you ended up losing money. So we tended to stay away from the foreign markets because of the currency factor. But the new ETFs, exchanged traded funds that are all -- or a very large number of them -- are dollar-denominated, they make a wonderful way to watch foreign markets.

You are a pure technician, looking at market-derived data. Do you care about things like 'Are rates particularly low?' or what Goldman Sachs has called the Brics countries -- Brazil, Russia, India, China -- and their newfound demand? Did they change the calculus of bottoms or tops? Or is that just background noise?

Well, that's the interesting thing about it. On a fundamental basis, the fundamental factors are always different in every bull market or every bear market. But the technical factors are based upon something much simpler. They are based on human psychology.

Investors tend to go from periods of extreme depression at market bottoms, to extreme elation at market tops. And there are always a different set of circumstances that help boost that change in psychology. But the range of human psychology remains pretty much the same. And we simply move from panic at market bottoms, fear at market bottoms, and finally we move to greed at market tops. And that is the limit of what technical analysis is really doing -- measuring the psychology of investors regardless of events that may have inspired their bullishness or bearishness.

This is a good a point as any to transition away from talking about bottoms in general, and talking about tops. You recently did an analysis of 14 historical tops of the past century, ranging from 1929 until 2000. One of the things that I find pretty fascinating is the Nasdaq, which was really the dominate index of the 2000 crash, dropped about 78%. And the 1929 crash in the Dow was down a comparable amount. Before we specifically talk about identifying tops, I am curious, how would you compare the 2000 crash to the '29 crash?

Well there are always areas of extreme speculation in any market advance. In the '29 case, the equity market in the U.S. was much simpler, less complicated than it is today. The NYSE was by far the dominate exchange, the Amex was simply a shadow of the New York. All of the technology stocks at that time were listed on the New York Stock Exchange, stocks like RCA and so one. Now, the markets are more complex and we have several places that we have to look. The Amex, for a period of years, developed into what the Nasdaq is today. In other words, the Amex was a place where companies that couldn't qualify for listing on the NYSE went to register. And that is the way the Nasdaq really started out, as initial stocks were just getting off the ground. Now it is still the dominate area for micro-cap companies and therefore an area of extreme speculation.

Editor's note: Tune in tomorrow for part II of the interview, where Desmond discusses his theory that market tops, as well as bottoms, give very, very identifiable signals and offers his thoughts on the current environment.
Barry Ritholtz is the chief market strategist for Ritholtz Research, an independent institutional research firm, specializing in the analysis of macroeconomic trends and the capital markets. The firm's variant perspectives are applied to the fixed income, equity and commodity markets, both domestically and internationally. Other areas of research coverage also include consumer, real estate, geopolitics, technology and digital media. Ritholtz is also president of Ritholtz Capital Partners (RCP), a New York based hedge fund. RCP is driven by the analysis performed by Ritholtz Research. Ritholtz appreciates your feedback; click here to send him an email.
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