Each morning, I go through a similar routine: I wake up (no alarm clock), go to the kitchen to get a cup of coffee (this is my machine of choice lately), launch a script that opens 40 or so Firefox tabs. As part of my morning research, I quickly scan this series of websites to see what happened over night, and what might be interesting.

Part of that list is Jason Zweig’s “This Day in Financial History,” which led to this morning’s gem: Today in 1997:

The Dow Jones Industrial Average closes above 7,500 for the first time, and The Wall Street Journal notes that the market’s climb ‘seems to inspire equal parts awe and dread among many investors.’ Fred Taylor, CIO at U.S. Trust, guesses that the stock market will end the year “lower than its current level.” (The Dow finishes 1997 at 7908.25, or more than 5% higher.)

Which leads to today’s question: Why is calling a top so much more challenging than seeing a market bottom?

I don’t think many traders would disagree with that notion. It is often said that “Tops are a process while market bottoms are an event.” Or as Michael Batnick observed, “Bull market tops are more difficult to call than bear market bottoms because doubt is a far more resilient emotion than hope.”

Allow me to rephrase that without any of the lovely subtlety I am known for: The dominant emotion at bottoms is fear — a palpable and very recognizable state. Tops on the other hand, come about through the combination of greed, complacency and indifference. This is a much more challenging set of factors to identify. Indifference does not cause a huge spike in VIX, a standard measure of market volatility; volume does not increase as traders become complacent.

There are many other forces at play: Continues here

Category: Investing, Sentiment, Short Selling, Technical Analysis, Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

9 Responses to “Why Is It So Hard to Call a Market Top?”

  1. milkman says:

    Interesting as always…now I’m curious Barry…what websites are on your other 39 firefox tabs?….

  2. rd says:

    Mechanistically, bull markets last longer and are more incremental in their gains while bears are much shorter and usually have at least a couple of water fall events where half the damage gets done in a very short period of time. Similarly, the economy spends much more time expanding than contracting.

    Once one or two major capitulation events occur in a bear market, usually after it has already been going on for several months, just about any bottom call will usually be closer to correct than wrong. Once a market has dropped by 40% or more, it becomes difficult for it to drop more unless there is a total economic debacle like 1930-32. After all the market can only drop 100% before it is wiped out in entirety.

    However, bull markets are built with lots of sheets of paper building up a big stack over a long time. It usually has lots of small dips and corrections during that process as uncertainty of the recent gains gets digested. So it is always difficult to tell which time it rolls over is going be the “big one” since there is no limit on how much the market can actually go up. In theory, if people behaved very rationally, it would be possible to have a perpetual bull market with slow incremental gains each year as people look at the economic growth 10-20 years out.

  3. BoKolis says:

    The public sets the top; the pros set the bottom.

  4. VennData says:

    Leveraged bets get wiped out in bottoms.

    When the margined are flushed, the nature of investors with AUM means they are always pouncing, value people sneak in and a bottom is formed.

    Tops are nuanced. After a temporary top, the averages are often passed through investor flows, new buy backs and other corporate action etc. Tops and got ms as noted are different.

    Asset allocators are concerned about neither since they are always selling high buying low, except these events give you feedback on whether you can stomach you asset allocation.

  5. supercorm says:

    Its not difficult calling the top. I called it 29 times so far since 2013.

  6. wisegrowth says:

    We can predict the top from effective demand. But then we cannot predict what monetary and fiscal measures will be taken to try and push the top higher. And international flows of money too. For example, I called the top of the Dow at 16,800 back in January. But the move by the ECB to loosen monetary policy in a way never done before has caused the market to loft over that top.
    You give the example of 1997 in the article. Profit rates still reached their top in 1997. But why did the market keep rising? Effective demand started to rise after 1997 for a number of years. Labor share rose. This allowed the market to keep rising.
    But there is less of a chance for effective demand to rise this time with unemployment still high in comparison..

  7. nanka says:

    don’t we have to hit a euphoria stage?

  8. Captin7Seas says:

    Just before the great crash, which the current bull run has repeatedly been compared to in an effort to warn of an approaching top, it was said that even the shoe shine boys were talking about and investing in the market. Even with the lasting burn from the last crash and it’s affect of keeping some out of the market, at some point usually late many individual investors still jump in and get in the market. I predict that at some point, maybe now if anyone is looking, mining the data from social media will be used as a gauge of how saturated the public’s interest is in the market – much as the shoe shine boy’s was indicative of it once upon a time.

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