Q&A: Paul Desmond of Lowry’s Reports, Part I (Part II), by Barry Ritholtz

… the buying power index is a measurement of demand, based on the law of supply and demand. So the ingredients that go into it are upside volume and what we refer to as points gained. Points gained are simply a very simple calculation of the amount of price change in every stock that advances for the day … As we saw this tendency of the NYSE to list more and more issues that were really not domestic common stocks, we felt the need to create a series of computations that excluded all of the things that could be considered to be distortions. So what we run our analyses on is what we call our operating companies-only statistics. For that, we create upside volume, downside volume, points gained or lost, advances and declines, new highs and lows, and a whole series of other indicators as well.

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You cannot time the market off of fundamental information, because the stock market operates off of expectations as to what is going to happen six months or nine months down the road … If you look at technical information, you can see signs of changes in investor psychology that are consistent from top to top … there is an extremely repetitive pattern that occurs at major market tops, and that pattern is one of selectivity.

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The major emotion that’s present at a top is one of complacency … people 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 about 15 or 16 months.

The real signal of a major market bottom is to first see a series of 90% downside days … But the key ingredient is to watch for a 90% upside day, indicating the prices have dropped low enough.

Interesting how Paul Desmond has adjusted the component stocks for his index over time.

– via TraderMike –