Do Not use Fundamental Analysis Alone! Market tops take time to form, just look bitcoin stocktwits fb at history and review the progressions of the previous setups. When reviewing the 2007-2008 market top, it’s clear to see that the setup took six full months.
Even then, the market bounced around for another four months but it was clear that the trend had changed, as the 200 day moving average had already started to trend downward and switched to resistance rather than the previous support it provided. The market made a final attempt to recover the 200d ma in April and May of 2008 but failed again, but much lower than the summer highs of 2007. A similar setup and duration took place with the Nasdaq market top in 2000. Lastly, the COMPQ dropped back below the 200d ma in September 2000, as the long term moving average started to trend downward, the first time in years. A long-term investor must accept that they will NOT get out at the top but remain confident that they can avoid the bulk of the downturn.
New Low Ratio is another key indicator that substantiates the move, one way or another, but I will leave that specific analysis for another post. As it stands today, the NH-NL 10-d Diff is still positive. As for the 2018 market, if anyone wanted a lesson in market psychology, it was on real time display as the calendar turned to February. Stocktwits on February 5, 2018, which highlighted the previous drawdowns for the DJIA over the prior two years. Further, the percentage of stocks trading above the 50-d ma started to drop rapidly, signaling a short term oversold signal, as this chart showed, posted on February 11, 2018. I’m not ready to call a market top or change in long term trend but I am watching.
What I have learned is that a market top or change in trend will likely take some time with several back-and-forth struggles between buyers and sellers. As for the stocks that start to fail, below their respective 200-d ma’s, considering selling a portion or all of that position. The last chart shows possible progressions, not that it will follow the exact points that I have created here but look for something similar and WATCH the 200d ma. Let’s see what this market wants to do. There seems to be some perverse human characteristic that likes to make easy things difficult.
Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years. It’s far better to buy a wonderful company at a fair price, than a fair company at a wonderful price. Many of the stocks that I profiled in 2017, were the same old stocks that I profiled in 2016 and 2015. Following the trend has worked well so why should I try to get fancy, chasing a few percentage points here and there while increasing my risk? The current market run from the bottom in March 2009 will reach nine full years in 60 days. It has been an amazing run with amazing stats along the way. At some point, the trend will end.