Anindo, the problem is that the end will be extremely difficult to time properly. once again the Nikkei serves as an example: the initial downswing in prices looked like any run-of-the-mill 10% correction - the only thing remarkable about it was it's speed, as two months worth of advances were erased in only 9 trading days. this decline was followed by 15 days of choppy trading during which a bearish flag pattern emerged. thereafter, the real selling started. one thing i remember clearly was that no-one, not even the critics of the Japanese bubble, expected a crash at the time. there had been numerous occasions before that time when dire predictions were proliferating, but by the time the crash was actually imminent, it was generally accepted that the valuation of Japanese equities followed rules that were different from the rest of the world and a deep-seated belief that the government would be able to stem any serious decline had taken root as well.
since the Japanese bubble is the best modern day equivalent of the current bubble in western stock markets i would look for similar developments to signal that the end is near: a swift and steep decline (not unlike the one from the july highs) that is greeted with equanimity by the vast majority of pundits, followed by a half-hearted recovery that retraces between 1/3 to 2/3 of the initial decline and then begins to stall. during the recovery stage, very little doubt must be discernible with regards to new highs being in the offing.
note that this is very much unlike the decline and subsequent recovery we have seen just now from the july top. in this case, the doom and gloom prophets were unusually active, and many technicians have expressed doubt as to the durability of the rebound due to the weak market internals. yet here we are at new highs for some indices and close to new highs for most others.
as many have noted, the speed and narrowness of the rally thus far suggests there is a high probability of a near term pullback - i would watch the reaction to that pullback in terms of the sentiment polls and put/call ratios closely to determine wether it should be bought or not. most likely it will be a buying opportunity as the polls still show bullish sentiment at very low levels.
the end will be characterized by doubt being utterly vanquished - some of this is already evident in the way WS now chooses to put a positive spin on bad news such as the ballooning trade deficit and rising interest rates.
another sign that the top can not be too far away time-wise is the publication of the books "Dow 36,000" and going one better, "Dow 100,000", both of which were deemed worthy of presentation on CNBC recently. the author of the first title (who btw warned of a 'dangerous bubble' at Dow 6,000 or so) declared that stocks should carry no risk premium and that therefore p/e's of 100 should be the norm, or the average. he even commended Prof. Irving Fisher posthumously for recommending to buy stocks in September 1929.
the second author more modestly extrapolates the performance of the last 20 years into the future, and arrives at 100,000 by 2,020 by doing so.
the increase in the appearance of such outlandish predictions is typical of the late stages of a long term bull market. average increases of 20% or more per year have now become the accepted norm and the authors of these claims conveniently forget that the stock market advance of the last few years is clearly not consistent with the 'norm'.
however, a blow-off rally to pretty incredible heights is probably in the cards, and i will wait for the first sizeable correction that is ignored by the pundits to indicate that the game is indeed over.
regards,
hb |
