Thursday, February 8, 2018

Is It Too Early To Call A Market Top?

A Few Really Bad Market Days Cause Fear And Dispair
Is It Too Early To Call A Market Top? Possibly but if the top has been put in which is possible what we are witnessing can without a doubt qualify as a "blowoff top." The wisdom of why stock markets around the world have suddenly taken a hard turn south may be debated for some time. Sometimes the real reason for market moves often remains hidden for a while and lost in speculation. In this particular case, at least five things are known.

  1.  Many of the investors in stocks today are new to the game and brimming with enthusiasm
  2.  Many of these newbies were playing fast and loose and strung out on margin
  3.  Few bears remained in stocks following a surge in stock prices that left them bruised and battered.
  4.  The fact stocks were greatly overvalued leaves a great deal of room for a pullback.
  5.  Concerns of inflation, rising bond prices, and central banks beginning to cut back have suddenly surfaced

Tops have been called in the past but every time the market or the economy began to stall another central bank stepped into the breach kicking fresh support to push markets forward and ever higher. Many investors have assumed the belief markets simply will not be allowed to crash because of the damage it would cause to the world's financial institutions. The reality, however, is this bull market has gotten long in the tooth and exceeded the average length they normally run. We should also remember this market has far exceeded upside expectations while the economy has in many respects has merely regained the ground lost after 2007.

Markets are emotional, how deep this pullback or correction will become is still unknown, however, many traders have been caught sideways and been dealt a solid blow. In this particular pullback, the longtime group of investors that have done very well and scream "buy the dip" during pullbacks in the past has joined with those with a "fear of missing out." It will be interesting to see how they handle adversity after being banged around a bit and a degree of uncertainty has now entered the picture. Both these groups have counted on central banks supporting prices and even going so far as buying stocks to drive this market higher. The central bank's large foray into stock ownership is just one indication of just how messed up and flawed the global markets have become.

In Times Of Financial Turmoil Values Take Wild Swings!
If indeed the market top has been put in a lot of wealth will most likely be lost as the market moves lower. How low or how fast it moves will depend a great deal on the fear level and psychology of investors. Studies have proven people tend to react more to losing money and the fear of loss than the joy they garner when things are going their way. This could explain several phrases describing market action such as markets climb a wall of worry, and the warning you shouldn't try to catch a falling knife during a crash or when markets are unstable.

History shows that when markets have indeed started a long-expected selloff it is not uncommon to see attitudes towards where to invest turn on a dime. We might witness a major shift in the value of one investment over another as investors seek firmer ground and a safe place to stash the wealth they have left. Derivatives, currencies, plunging stock prices, air rushing out of a bond market bubble, how debts are structured, and the timing or direction from which problems arise are all elements that must be considered. Several factors determine just how much influence can be applied to how current economic policies unfold.

In a situation where markets become unhinged the metaphor "let the chips fall where they may," could become the rule as investors scramble to get out of the way. This would mean things like the size of the chips, the rate or speed at which they fall, and the number of chips in the air may make them uncontrollable. We could find ourselves up to our neck in chips in a blink of an eye, at that time all bets are off as to how successful efforts to stem a catastrophe might be. If the financial overlords lose control we may see the final stage of a global shakedown become very chaotic and wild swings occur as markets seek sustainable valuations.

1 comment:

  1. I'm back. College town real estate guy. I sold all my stocks about 1% down after holding since '08. That final move looked like a classic blowoff, and I've seen a few of those in 23 years. And a few plunges too! I remember my 1st bear market. Not the Russian crises of the late '90s, or the Asian contagion, but the real dotcom deal. The contagions of the late 90's just set me up for the great rendering. I thought I knew what a bear market was like. I didn't know squat. Have your stocks fall, and NOT bounce back. Its the psychology of it. Dreaming your in a train wreck that never ends, and wake up to futures flirting with lock limit down. Sweet. The best stock, the one that holds up, is the real turkey. My Sun Microsystems was up on a 17 to 1 down day, but eventually ended up going poof! My CAT going down day after day, as .com flummery skyrockets. Firepond baby!

    Then knowing things are great buys, buying in, and losing 25% in a week. JUST BEFORE THE BOTTOM! Can you hold through that?

    Somehow I've made money through all the anguish, only to realize I'd have made more by holding CAT, or even IP, long term. People go 'but you've made money', and I just cringe because I could have made more by buying boring and forgetting. Lots of fresh meat needing a good talking to. Paraphrasing Delbert Grady from The Shinning 'But I corrected them'.