As the markets continue to move higher and experience low volatility, we are hearing constant chatter about reaching a market top. Naturally, these predictions rarely come with a calendar date, ensuring that these foolish prognostications are correct at some point in the future (just like how a broken clock is right twice a day). For investors, the discussions of impending doom and gloom are useless – and distracting.
Calling a market top (or bottom) is an attention grabber, especially now because it means you are going against the tide. Sure, they might be based on prior experience and patterns that repeat. However, a market top is a process, not an event, and the market will give plenty of signs that we are heading in that direction.
Are we at a market top?
The straight answer is, I don’t know. But here’s what I do know. If the bull trend is changing, it will be far different from where we are now – buying dips or even seeing corrections. The market action will change, volume levels will pick up, and price action will turn nasty. Dips won’t be bought and the indicators will turn decisively negative.
One of the reasons investors are talking about a market top is because a correction would be healthy. We know markets don’t go to the sky forever, and that eventually prices come down. When a market becomes irrationally expensive, the smart money moves aside. Often this is done before anyone seems to notice or care, but when those dip buyers are absent a new reality takes hold. “My stocks won’t go back up, so what do I do now?”
So here we are, in the ninth year of an incredible bull market rally. Market performance this year has been stellar with the SPX 500 up more than 8% and the Nasdaq up double digits. Most indices nailed all-time highs – some of them multiple times. And how often have we heard a market top is coming? Several times.
As far as I can tell, we could be in a brief sideways pause before the rally resumes. The best we can do is follow the lead of market indicators, price action and volume. When they turn, we will turn. We might be late, but it is better than endlessly calling for a market top and losing over and over again before finally getting it right.
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