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Why Is It So Hard to Call a Market Top?

Posted By Barry Ritholtz On June 10, 2014 @ 8:45 am In Investing,Sentiment,Short Selling,Technical Analysis,Trading | Comments Disabled

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 [1]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 [2],” 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 [3], “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 [4]


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URL to article: http://www.ritholtz.com/blog/2014/06/why-is-it-so-hard-to-call-a-market-top/

URLs in this post:

[1] machine : http://amzn.to/1o8YgTU

[2] This Day in Financial History: http://www.jasonzweig.com/thisday.php

[3] observed: http://theirrelevantinvestor.tumblr.com/post/88215616013/bull-market-tops-bear-market-bottoms

[4] Continues here: http://www.bloombergview.com/articles/2014-06-10/why-is-calling-a-market-top-so-hard

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