Calling a market top
Financial news outlets are talking "top" lately, with some leading pundits and investors calling an end to the rising market of 2009-present. But may we say, as Mark Twain once did after seeing a newspaper obituary of himself, that "the reports of my death are greatly exaggerated'?
"As someone who's called a few market tops," my colleague Damon Vickers started off a discussion the other day, "let me tell you, there's a right way to do it, and a wrong way to do it." (Background: Vickers called a market top in 2000 and again in 2008-2009, as you can review in "Damon Vickers got it right," here.)
Some general rules are:
1. You're not going to get the exact top.
Well, maybe once in your life. But if you try to get the very top of the peak every time, you're going to get distracted, miss some opportunities, and invest in some bad ones -- in other words, you're going to fall of the mountain sometimes.
Realizing how rare it is to time something perfectly is actually the key to a second rule:
2. It may be wise to look for some confirmation from reality, i.e., the market.
Is there such a confirmation today -- i.e., are there indications in prices that we've hit the summit? There doesn't appear to be much basis for it, other than the gut instinct that "things are overpriced."
Indeed, as Vickers notes, the near-term, medium-term and even two-year trend is up. The Dow has a rising 50-day and 200-day moving average, and has not decisively violated and closed below both of them since last fall.
The people now calling a top could be right -- it's just hard to find evidence for it in that wonderfully efficient summary of animal instincts and money flows and trading trends and valuations... price.
3. Don't get distracted by squiggles.
Ultimately, as the old Wall Street saw goes, "it's not a stock market, it's a market of stocks." If you simply want to capture whatever the market is doing, you may as well buy and sell an index market.
What we do at Damon Vickers is try to focus on our picks, to find companies that have a chance to out-perform the market. We also seek to manage the risk of individual positions, which is why Damon Vickers will, occasionally, take short positions and even be aggressively short -- if there is some basis for being so.
But trying to hit a hold in one off every tee, as most golfers will tell you, can really mess up your swing. Plant your feet, relax, eyes down the fairway, and swing. Try not to three-put. Now and then, you'll hole out, and you should enjoy it. Just don't stop practicing your short game.
Investing in securities and the financial markets involves risks, such as currency fluctuation, political risk, economic changes and market risks. As with all investments, an investor should carefully consider his investment objectives and risk tolerance as well as any fees and/or expenses associated with such an investment before investing. Investing in financial markets and their publicly issued securities may not be suitable for all investors.