Q&A: Paul Desmond of Lowry's, Part II

Let me ask you a question about that, though, because the counter argument would be: Well, people get paid every other week, and they are making contributions to 401(k)s and IRAs. These days, there is some $3 trillion in money market accounts. Do they ever truly run out of money or is it more a matter that the sentiment begins to shift?

Sure. Well it occurs at a whole series of different levels. For example, some investors simply invest everything they've got and they're out of money. Others will look at stocks and say, you know, I was enthusiastic about it when it was $20 but now it is $60, I'm not so enthusiastic. Others will say, my wife wants to take a vacation, so I have to spend the money on a vacation instead of investing in stocks.

Whatever the reasons are, the enthusiasm for continuing to put money into stocks begins to fade. And as it fades, the demand side of the equation diminishes, but the selling side begins to pick up, so sellers then are dominating in the market, and that is what tends to send prices down.

And this is not the way we tend to see bottoms, like a 90% downside day. Tops are really processes, while bottoms are a specific point?

Exactly. The major emotion that's present at a top is one of complacency, where people are fully invested in stocks, or are invested as far as they are going to get, but they are convinced that prices are going to keep going forever, and therefore they are willing to ignore the initial market declines that come along from time to time. As they say, they are 'in for the long term.'

At market bottoms, you have a completely different pattern in which the dominate emotion is fear and panic. And what we found at market bottoms, for example, was that in a typical major market bottom, you see a series of 90% downside days, 90% of all the volume, 90% of all the price changes are on the downside. Now the interesting thing that we found was that you can have a whole series of 90% downside days. During the 1973 and 1974 bear market, there were 15 90% downside days.

Over how long a period of time?