Sensible Investing

Signs of a Market Top

January 14, 2010

Here’s a an interesting article that presents a history of major market tops and also discusses clear signs of one.  An excerpt follows:

We’re nowhere near a market top now, but it pays to remember the signs in advance, like: (1) A general market euphoria, with talk of a “new investment era,” in which major corrections are a thing of the past, with the business cycle being softened or repealed. (2) Books like Dow 36,000 will replace the perennial “beware the coming crash” books on best-seller lists; and (3) market gurus will praise the virtues of “buy-and-hold,” while mocking the futility of “market timing.”

Right now, after a major crash, I can’t find anyone who will defend buy-and-hold.  Newsletter rating guru Mark Hulbert made a study of this phenomenon back in 1996 and found that investors disparage buy-and-hold when buy-and-hold would serve them best (as in the 1990s). Then, they become disciples of buy-and-hold at market peaks, when they should unload their big winners.

Ken Fisher echoed those findings in his 2007 book, The Only Three Questions That Count, saying (on page 277) that “at a bull market peak, there is endless advice saying you should never turn bearish and you should never ‘time the market,’ and that people who do are destined to miss the big returns of bull markets.  In 2000, this advice was rampant. The financial services industry marketed heavily that any professional who turned bearish was a quack or a charlatan.”

Entry Filed under: Market Conditions. .