Tools for Spotting the Making of Market Tops
This morning I read a great piece by Barry Ritholtz @ritholtz on Bloomberg View titled How Market Tops are formed I have posted an excerpt from it below:
With all the bubble chatter and talks of over-valued stock markets, I thought it was time to have a discussion with someone expert on the subject. In this case, that person would be Paul Desmond, chief strategist and president of Lowry’s Research.
Desmond has spent the past five decades analyzing markets; his research is widely regarded as both unique and insightful, winning numerous awards from various technicians’ groups. If you want additional background into his thinking process, have a read of the long interview I did with him in 2006 (Part I and Part II)
What I really love about his work is how empirically driven it is.
I spoke with him recently, chatting about his work in identifying market tops. Rather than focus on the usual noise, Desmond suggests anyone concerned about a top should be watching for very specific warning signs. He notes the health of a bull market can be observed by watching internal indicators that provide insight into the overall appetite for equity accumulation.
These four include:
1. New 52-Week Highs
2. Market Breadth (Advanced/Decline Line)
3. Capitalization: Small Cap, Mid Cap, Large Cap
4. Percentage of Stocks at 20 percent or greater from their recent highs
you can read the rest of the article (which I highly recommend) here
Barry and Paul Desmond make great points here which I agree with and are mostly the premise for the Strength In Numbers Report each weekend. I say mostly because I have not studied #4, but will be in the future. The other three are pillars of the SIN report. #1 is covered by the New High – New Low Differential Chart, #2 by the Advanced Decline Chart , and #3 by the Equity Size and Style Relative Strength Rankings. I believe the key here is combing the market breadth with relative strength to guide us. This gives a great Macro view of market strength before we dig much deeper into the sectors in the rest of the report. So you can go and see yourself, I have unlocked this week’s report early for your review here .
If you would like to be added to the list to receive this report please email me: gtlackey@gmail.com and I will be happy to add you.
Good Luck! It is there for the making…
G. Thomas Lackey Jr, CMT CFP®
Follow me on StockTwits and Twitter @gtlackey
(All market data above are derived from Stockcharts.com, Esignal, and Reuters Datalink)
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