Timing a stock market top is always challenging and keeps even expert traders and analysts scratching their head at such major reversals. Traditionally, there are many technical and fundamental indicators which are helpful for an assessment of a euphoric market and could keep you on toes for a major market reversal.
Using technical analysis you could use momentum divergences, overbought indicators, end of a 5th wave in Elliott Wave Analysis or major reversal price patterns. Likewise using fundamental analysis you could use the earning multiple market is trading at, P/E band, market cap to GDP ratio, etc.
Let’s leave these jargons to the experts and look at few unusual ways which could help you spot a market top. Remember one thing, market tops are not formed because there is heavy selling, but because there is no buyer left.
No, this isn’t some short form of some technical indicator; it’s the “Mother Indicator”; specially the housewives. My mother is the last person on this planet who should be concerned about any financial markets and she is a time tested indicator to mark a market top. Last time she forced me to buy gold just because it crossed 32,000 and all her friends were in a buying frenzy because they had a consensus that it will touch 50,000 sooner than the next two months. We all know what happened to gold last year. The other time she asked me “Why has dollar become 70 suddenly?” And as if the RBI heard her concern, they got in Raghuram Rajan and instantly solver her problem. I am happy she hasn’t asked me about Sensex yet, but I am worried she might soon.
Upgrading of market news from finance section to regular columns
Euphoric market news is surprisingly taking notice everywhere. And at major market tops if the headline new on the regular news columns talks about Sensex hitting new highs, etc. be assured that the market top is around the corner. A column in the finance section is usual, but if Page 3 wants Page 1 to be about markets then there is serious trouble.
Social media jokes, hype
Remember all the jokes on dollar when is started rallying beyond 60-65? I even got a video on WhatsApp with P Chidambaram and Manmoham Singh with their journey of dollar-rupee from 45 to 65. Many people will not even be trading or investing in these assets but too much hype on social media about a market movement next time will warn you of a big reversal soon.
Absurdly higher level forecasts
All euphoric market highs will be accompanied with unrealistic market forecasts with roof top predictions. In 2008 January targets of 25000, 29000 were heard for Sensex. Goldman Sachs published a report on crude with a target of $200 just before it tanked from $145 to $35 in 2008. In 2011 somebody told me silver will cross 1 lakh. Like how my mom was dreaming of gold to become INR 50,000, I am sure you must have heard of dollar rupee going to 100 or even 120 last year. Such predictions are warning signs of a market tops.
The round number gimmick
When any of the above four indicators happens to coincide with any round number on the market the probability of a turn increases rapidly. If Sensex moves from 15,786 to 19,856 general public doesn’t care too much. But take it just 144 points higher to 20,000 and everybody will take notice of it and get an elevated feeling of how much high it has come. That’s how human psychology works.
It is believed that only 5% of market participants make money in the market. So when there is euphoria about buying or selling something and everybody on the road wants to be on one side, you know which side you should be. Now just wait for your mom to take notice of Sensex!