Tops Are A Process, They Are Rounded, They Are Economic | Exploring Markets

Tops Are A Process, They Are Rounded, They Are Economic

One of the great Wall Street trophies is the top caller. That trophy being awarded to the one able to correctly predict market tops and corrections. Calling tops is one of the most difficult predictions to make on the Street, but also deservingly so, one of the most respectable if repeatdely correct. 

In pursuit of market tops and corrections, we've decided to compile a few quotes and anecdotes for your armory.

First, from Paul Desmond and Financial Sense:
"Of the 14 major market tops, between 1929 and 2000, inclusive, when the Dow Jones Industrial Average reached its absolute peak, the average percentage of stocks also making new highs on that day was 5.98%." 
When the stock market peaked in 2000, 53.33% of stocks were already down by 20% or more from their highs! What Lowry’s research of bull market tops essentially points out is that a significant percentage of stocks have already experienced a bear market before the market indexes even top, meaning monitoring market breadth for deterioration is a helpful tool in determining whether a major market peak is approaching. 
Consider first an analysis of the last 13 bull-market tops recently conducted by Ned Davis Research, the quantitative research firm. On average, the firm found, just 13.2% of NYSE-listed issues were hitting new weekly 52-week highs at those bull market peaks. At the Oct. 2007 market top, for example, the percentage stood at 14.4%. At the bull market top in early 2000, furthermore, the comparable percentage stood at just 6.4%.

Second, the importance of declining economic data. Most importantly that is Retail Sales. Consumer spending makes up 70% of the U.S. GDP. As the consumer spending goes, so will your stock market. It is a fact. The market has never once ended up on a day where the consumer confidence number fell harshly from the prior week.

Third, from The Reformed Broker:
Tops are a process, Bottoms are an event and Middles are a motherfucker. Market-timers don't live long, its a horrible existence. My friend JC likes to say picking tops and bottoms is the most expensive job on Wall Street. A lot of the media's time and attention is spent discussing whether or not something is bottoming (housing, stocks, consumer confidence, ratings, etc) or topping (tech stocks, valuations, bond prices, sentiment). It's great conversation but not helpful.

Four, Thomas Bulkowski, Robert Edwards, and John Magee say Tops Are Rounded:
Robert D. Edwards and John Magee describe the rounded top as being a "gradual, progressive, and fairly symmetrical change in the trend direction, produced by a gradual shift in the balance between buying and selling". For a rounded top, the price can fluctuate or be linear. However, the overall curve should be smooth and regular, without obvious spikes.

See more, Sources listed here:

The Reformed Broker Tops, Bottoms, and Middles 

Thomas Bulkowski Rounding Top