Can you spot a “Market Top”?

The current bull market in stocks reached its 8th anniversary on March 9th, and for about the last four years, professional investors and financial planners have been scratching their heads.  The markets have gone up and up and up, and we all know that they won’t go up forever, which means there’s a correction looming somewhere on the horizon.

An interesting description of how to spot a market top was published on the MarketWatch website, entitled “7 Signs We’re Near a Market Top, and What to Do Now.”

What are the signs?  The first one is when you see retail investors start pouring money into stock mutual funds, in fear of missing out on another year of growth.  Second: the survey of professional investors starts showing a low proportion of bears to bulls, basically meaning that the bear market prognosticators (and there are some who nearly ALWAYS predict one) start to give in. 

Third, market sentiment indicators like the VIX index (that tells us what traders think of future market volatility) start to look complacent.  Fourth: you see record price/earnings ratios, which means people are ignoring value and simply expecting future growth.  Fifth: investors are finally starting to forget the last market crash, and have stopped looking over their shoulders.  Sixth, the article says that the Nasdaq index of mainly tech stocks will begin a bull run.  And seventh, investors reach a tipping point where greed outweighs fear.  Instead of fearing a market pullback, they fear missing out.

Does any of this look familiar when you look at today’s markets?  It’s important to recognize the most seasoned market watchers can and will be way off on their timing and future predictions. That MarketWatch article that talked about the seven signs of a market top?  It advised people to start edging out of the market as soon as possible, because the red flags, it said, were everywhere. It was published in March, 2014!

A safer way to weather the storm is to simply hang onto the restraining bar in your roller coaster seat and endure the bumpiest part of the ride.  If you believe that stocks will eventually recover, as they always have in the past, then eventually you’ll be looking at gains again while a lot of your friends and neighbors will have sold near the bottom in the last stages of a bear market capitulation.

 

Sources:

http://www.marketwatch.com/story/7-signs-were-near-a-market-top-and-what-to-do-now-2014-03-07

http://www.marketwatch.com/story/why-the-end-of-the-earnings-recession-doesnt-guarantee-stock-market-gains-2017-03-08