7 signs we're near a market top, and what to do

Wall Street has been reliving the 1960s, but the 'Go-Go' era is about to end.

By MSN Money Partner Mar 10, 2014 12:23PM

MarketWatch on MSN MoneyHiker on a mountaintop in New Zealand (c) Getty ImagesBy Michael Sincere, MarketWatch


Remember March 4, 2014 -- a day that will go down in Wall Street history as the beginning of the end for this latest bull market, which is celebrating its fifth birthday.


On March 4, the Dow Jones Industrial Average ($INDU) rose 227 points based on a report that Russian troops were pulling back from Ukraine's border. This "news" lit the market on fire, a sign that the market is heading into a mania stage where it doesn't take much to boost stocks.


Indeed, nowadays instead of the "Nifty Fifty" stocks that defined the late 1960s market, we have the likes of Facebook (FB), Tesla Motors (TSLA), and Chipotle Mexican Grill (CMG) -- the new new things.


Can the market go higher? Sure, although the higher it goes, the more dangerous it becomes. Often, during the latter stages of a bull market, the market separates itself from reality and appears to be on another planet.


Such red flags are everywhere:


1. Retail investors have been pouring money into stock mutual funds. The fear of missing out on the sixth year of a bull market has created something close to a buying panic. Although not as maniacal as we saw in 1999, the stock cheerleaders are back and rooting for their stocks and mutual funds to go higher -- just like they always do before a crash or bear market.


2. The Investor's Intelligence survey is concerning. The closely watched II survey shows a low proportion of bears (less than 20 percent), which some have pointed out is the lowest proportion since just before the 1987 crash.

3. Sentiment indicators are pessimistic. The VIX volatility index, the put-call ratio and other major sentiment indicators suggest that investors and traders are getting complacent. Apparently, market participants believe that the Fed, or their fund manager, will protect them in a worst-case scenario.


4. Fundamentals are being ignored. Obscenely high price-to-earnings (P/E) ratios are passed over, along with soft economic readings (i.e. GDP and ISM). When the fundamentals are weaker than expected, the weather is blamed.


5. The stock market crash of 2008 has been forgotten. Investors forget, but the market never does. Those who do not heed the lessons of the past will once again learn a painful lesson.


6. The Nasdaq is soaring. The three-year chart of the Nasdaq ($COMPX) has gone nearly parabolic, hitting a 14-year high of 4,351 on March 4. It's the Go-Go years all over again. (And that late 1960s bull market ended with the 1973-74 bear market.)


7. Fear and greed are taking over. When the market reaches the tipping point (and we're getting closer), investors and traders buy "ATM" (anything that moves). The fear of missing out causes a buying panic.


What to do now

There have been numerous crash predictions over the last five years. As a result, many investors have closed their ears, and who can blame them? The market has ignored the warnings and continued to go up. One thing about crashes: They can't be predicted (but it won't stop people from trying). However, it is possible to recognize a dangerous market, which is what we have now.


The market is wearing no clothes

Just like the emperor, the market is wearing no clothes. Right now, many people see only what they want to believe. It's been a long time since investors felt full-throated fear, and many have forgotten what it feels like. The panic to buy will be replaced by the urgency to get out at any price. No one can know what will cause perceptions to change, but they will.


At the moment, emerging markets are in deep trouble, and what is happening in Ukraine didn't help. Nevertheless, the CEOs of several major brokerage firms have urged investors to "go long" emerging markets because they are so "cheap." Once again, these well-educated salesmen are wrong. Emerging markets will recover one day, but not soon. Urging investors to buy on the dip is disgraceful.


Sit and wait?

If we are in the mini-mania stage of the bull market, the market will continue to go higher based on rumors, hope, and greed. Sitting on the sidelines and waiting for the bull market to top out takes tremendous discipline. Trying to capture that final 5 percent can be costly if you get the timing wrong (and most people do). Be prepared for increased volatility as we get closer to the end.


Of course, it's not easy to sit on the sidelines when everyone else seems to be making money. Although many investors are dreaming of another 30 percent return this year, the odds are good that it will be a difficult year. Yes, during a mania stage anything is possible, but with each passing week, the clock is ticking.


Those who have studied market history have seen this story before, and the ending is always the same. No matter how many warnings you give, no many how you urge people to avoid buying the speculative Go-Go stocks and move to the sidelines, few listen until it is too late.


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44Comments
Mar 10, 2014 12:49PM
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I refuse to buy any stocks right now outside of my 401. And that has been reduced to 40% stock and 60% cash/bonds. And there it will stay until the fed stops propping up the fake economy and there are signs of a real and healthy economy. And then there is the debt...
Mar 10, 2014 1:38PM
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When the free money is stopped the bubble will burst.
Mar 10, 2014 1:01PM
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I've had a great run the last 2 years so now is the time to lock in some profits and slowly move to cash.

Mar 10, 2014 2:14PM
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Two things I’ve noticed about the stock market over the years:

1 - It can’t go down until all the greater fools have bought in.

2 - It’s kind of like a playground slide; the ride down is always a lot faster than the walk up.

Mar 10, 2014 1:47PM
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#1-- The Federal Reserve is hitting Ctrl-P
Mar 10, 2014 2:15PM
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"On March 4, the Dow Jones Industrial Average () rose 227 points based on a report that Russian troops were pulling back from Ukraine's border. This "news" lit the market on fire, a sign that the market is heading into a mania stage where it doesn't take much to boost stocks."

 

Was that really a sign that the market is heading into a mania stage or was that more of a recovery from the 197 point drop the day before? The net 2 day move was no more than 30 points to the positive. or less than 0.1% over two days. The bulls definitely appear to be storming in and creating irrational exuberance.

Mar 10, 2014 3:13PM
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The market will go down eventually but believing your prediction is no different than believing others who say it's going to continue to go up. If you say the same thing long enough if will eventually come true. The one thing I find is that there is no where else to put your money and get any kind of return so if you keep it on the sidelines you are losing money already anyway.    
Mar 10, 2014 1:25PM
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Goldman Sacks is considering hiring Vandersloot as their CEO. His freeloading, aggressive, narcissistic, evil, ruthless, psychopathic style is a natural and ideal match for Wall Street success. 

Mar 10, 2014 5:50PM
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Trying to predict market tops and bottoms is a fool's game.
Mar 10, 2014 5:25PM
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How many articles do we need on the coming crash?
Mar 10, 2014 1:03PM
Mar 11, 2014 4:08AM
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Number 8, when folks are posting this, "The one thing I find is that there is no where else to put your money and get any kind of return so if you keep it on the sidelines you are losing money already anyway."

So whenever Folks continually attempt to hide the Real Risks of Stocks, you know we are are likely to be near a Top, then anything else. There was an Article yesterday that stated Global DEBT has risen 40% since the Great Recession to over $100Trillion. So we are not nearing a Bubble, we are in a Bubble. 
Mar 10, 2014 3:42PM
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Depending on my stock, I sold near term options in the money or at the money on almost all of my positions.  I did it over the past week.  The market is making me quite nervous. .  
Mar 10, 2014 3:21PM
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The Fed has made he market with free money to banks and it may never end!!What a fack system!
Mar 10, 2014 1:35PM
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Keep spouting gloom and doom and surely it will happen!
Mar 10, 2014 12:57PM
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You must have become a victim of the bad weather.
Mar 11, 2014 10:51AM
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Well first off most of this article is a lot of crap. 

I spend a lot of time following  the market and the economy, and I do know what's happening.

1. The little guy isn't pouring money into the market. At best he is nibbling!
2  Investors Intelligence is useless as a market indicator.
3. Sentiment indicators are useless too, since they can quickly change. Investors are nervous which is typical in a bull market or climbing the wall of worry.
4. Fundamental aren't being ignored by investors. For example there is a lot of concern over P/Es and  other ratios making investor VERY nervous.
5. The '08 crash is imprinted in every investors mind adding to his worry.
6. Yup the indexes are doing well further adding to investors worry!
7. Fear and greed are a constant ingredient of investor's behavior; however, they are still too fearful to be so greedy to drive this market to absurd levels. Wait a few years.

Now lets assume that we are at a market top. What should investors do? Sell now? Sell at -10%, -20%, -30%.....?

First we are in a recovering economy, and the data clearly shows the economy is gradually improving. Revenues and earnings of most companies are doing OK, so there isn't any reason to not expect them to do better as the economy does better.

If the market has a substantial correction or any for that matter, stocks will look even more attractive. One simple example is P/E. If earnings remain constant and prices decline, stock valuations will look more even attractive. Investors will jump on them and drive prices up. 

Har har har me hearties me booty of Gold Doubloons grows mightly!

Mar 10, 2014 3:38PM
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He doesn't really say what to do does he? I only recently started rolling the dice at the Wall street casinos and so far none of it's making sense. The stocks i've bought are all small companies that have had good news attached to them and yet they are falling like a rock!
Mar 10, 2014 6:42PM
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Ever been to a craps table?  Welcome to the life of craps!
Mar 10, 2014 4:58PM
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                             We Failed People:     And We Failed Miserably.. 

This took me a long time to understand...


The intentions were good "I Believe" but the facts are "Our Government" in order to sway the 

outcome of a "Market Gone Bad" didn't factor into the equation  that those same people

who allowed  the stock market to falter  weren't "Carpet Baggers" and "Grave Robbers" to begin with.. 

I remember going to the bank, when the market first took a nose dive, and all around me were people taking money out of their accounts and even closing their safety deposit boxes. Do you remember when the FDIC was at 150,000.00 dollars and the government changed it over night to 250,000.00 dollars in order to stay off a stampede of withdrawals.

Do you remember the hundreds of billions of dollars WE gave to the banks with no strings attached. (The money was given in good faith in hopes that they would use it to give out Small Business Loans) but instead the Banks just went out and bought up the weaker banks in order to build their own infrastructure..

We could go on and list other times where we have trusted  "Big Business" to do the right thing or even our own "Government" to pull the right strings, BUT it just didn't happen. AND IT WON'T.

Greed and the Greedy, Self and the Selfishness RULES..

AND IT WILL NOT CHANGE NOR CAN IT...

Those who are CEO's and Government Figures and Heads of States understand , and Dear God don't forget about Russia who's own economy is on the brink of disaster,  they Know.. We Are In Over Our Heads....

And when that happens you either "Drown" or "You Start Swimming".

So, Has the Market reached its peak? NO... and why?

Because the dollar isn't a dollar any more. Inflation has been thrown sideways and crossways upside down.. What you believed to be isn't any longer.. Money has no value and neither does the Stock Market.. It can Go to 20,000 points in a blink of an eye.. why??BECAUSE IT'S POWER..

Some of you will understand this and will go on to be fruitful and multiply and the rest will just go on, tappen at those little letters on your keyboard, watching the world pass them by, never knowing what Hit Them..

And You'll Be Broke.. not just wanting a hand out, but needing it, just to survive.. There's more people out there who missed the "Greatest Bull Market" the world has ever seen, then those who got into it from the get go and made Hundreds of Thousands if not Millions of Dollars..

And That Growth, In That Short of a Time, has created  the "Mother Of Inflation" ( Of Which The  World Has Never Known).......


 

  

                            

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