Proceed With Caution...Don't Try to Pick The Top

By Nick Fisher, Portfolio Manager and Alex Bridgeman, Intern

As the current bull market continues, more investors are starting to predict the day it all comes to an end. Instead of trying to predict a market top, according to Mark Hulbert (of Marketwatch), investors should view market tops as a “gradual process in which equity exposure is slowly and deliberately reduced over time.” Predicting tops is not only unproductive, but it is also impossible to be accurate. Trying to pinpoint the precise date of a market top cannot be done because markets all reach their tops at different times. 

It is easy to say that the 2002-2007 bull market ended on October 9, 2007 since the S&P 500 and Dow Jones (large stocks) both hit their tops on that day. These two indices however are not representative of all markets. The Russell 2000 (small stocks) for example, hit its top three months earlier on July 13th. Even earlier was the top of the Dow Jones Utility (sector) Average on May 21st. Finally, nearly a year earlier, the SPDR S&P Regional Banking (sector) ETF hit its top in December 2006.

Citigroup notes the recent lack of sector participation in this correlation chart. Recently these divergences between sectors have preceded market tops. 

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Hayes Martin, president of Market Extremes, has also pointed out significant divergences in recent months which suggests we are likely in a long-term topping process. 

Does that mean investors should start worrying about which day that top is going to fall on? On the contrary, investors are much better off “proceeding with caution” as we (along with Howard Marks) have mentioned in the past and will discuss in more detail going forward.