Wednesday, January 20, 2010

Is the Stock Market Topping ?

This question is sometimes on my mind. How long before another turn of the market to a new cycle, currently to a new bear market cycle, a continuation of a secular (broad) bear market that began in 2000. Are there signals I can use to help me be alert to a looming change? Today on Financial Sense I read a very good description of the kind of simple indicator that can be easily employed. The article is written by, yep, Chris Puplava. (Are you reading Financial Here is a link to Market Tops Are a Process, Not an Event.

A surprising point made in the article is that when the NYSE has reached the statistical high for its current bull cycle, over the past 13 market tops, just 13.2% of listed issues were reaching new 52 week highs at those market peaks. These observations were made as part of a study that also observed that the market top was not indicated by the percentage of 52 week highs being reached, but that this merely preceded the market top. And, just as interesting, is that the lead time averaged over the study period mentioned, is about 8 months. You should read Chris's article.

It should be mentioned that the points made are very interesting indeed. I am struck by the implication in Chris's writing, that the markets are still operating in a business cycle environment. In other words, the article assumes there will be no difference in the market response to stimuli that is administered by the Fed with the Treasury. The more normal scenario would be markets responding to cyclical developments which are the result of a recurring series or confluence of business influences that could have been anticipated. There has been a lot of discussion on the blogosphere, including on Financial Sense, that this recession is not an outcome of cyclical economic activity. Instead, it is the result of the bursting of a bubble of the worst kind, a credit bubble (a simplification, to say the least). An abnormality, resulting from interference by the previous Chairman of the Federal Reserve Board, the current Chairman of same, the regulators, Congress (both parties), the White House, the media and the vast majority of Wall Street. So I will be cautious about how much this market indicator influences my thinking.