To: donald sew who wrote (10709 ) 4/12/1999 6:11:00 PM From: pater tenebrarum Read Replies (1) | Respond to
Donald, i just had a look at your index update where you mention the possibility that we may see a blow-off top. i have discussed this with bb a few days ago, saying that we may be in for a blow-off top a la japan '89. as the japan example illustrates, such a top is almost impossible to recognize and time. the reason for this is that it usually occurs with broad participation, on strong volume and rising momentum, which seemingly confirm that the trend is intact.another feature is that short term overbought readings can persist for quite some time in such a scenario. valuations, which are normally already stretched before the beginning of the blow-off phase, get stretched beyond the wildest imaginings. the best place to look for with regards to blow-offs in the past(aside from japan) are the commodity charts of the late '70's. what they generally show is that shortly after the top is in, a small window of opportunity exists for closing out long positions and initiating shorts. what happens is that once the top is in place, the market goes through a few days of unprecedented volatility, whereby 1-5 days after the initial break the top is almost reached again, on the face of it giving the impression that the rally may still have further to go. before this high-volatility phase at the top begins, a marked shift in sentiment should be discernible, e.g. increased talk that valuation measures have to be adapted (new paradigm-speak), heavy speculation in calls,large futures accounts going net long, brokers increasing their equity allocations, news magazines sporting cover stories about the bull market's invincibility,etc. it has to be said that a blow-off harbors great dangers for both bulls and bears as the former are likely to get out too late and the latter to get in too early . in the case of the early bears though, they will eventually be sitting pretty if they can stomach short term losses, as blow-offs always lead to a retracement of a large part of the advance that preceded them (historical examples abound).
