Buen ' Dia', Oct 26 : Calling the Top.......Who cares? Why you should.
Many bloggers are “Calling the Top” but what does that mean? To some bloggers it’s like a game where you guess the number of pennies in a jar. To others it’s a show of prowess with their use of some analytical methodology. Others enjoy sharing something they feel is beneficial and get satisfaction from it. I, on the other hand, am just plain ornery and thought it best to cut through all the crap you can read and spell it out, particularly for those of you not old enough to have had first hand experience with a top other than Oct 2007.
We should start by defining "TOP". To a trader, the top can mean simply a high from which the market retreats for some period of time and is therefore tradable. In fact, to a day trader, the top can mean high of the day. However for purposes of this article I choose to define “The Top” as - the time period in which an investment is worth at or near its maximum to which it will not return for a period of time measured in years that are unacceptable to the investor. Thus there is some leeway in the definition for investor’s circumstances. To a trader, prudently trading with a small percentage of his net worth, a 50% drop might not be the end of the world. And yet, to a pensioner who is past his productive years 10% might be huge. A drop in the market, for instance, of 30% requires a 50% increase to get back to even. The S&P dropped about this amount in both 1970 and 1987 and it took 2-3 years to recover. In 1973 and 2001 the S&P fell 50% or so. In both cases the recovery took about 8 years. Even a retracement of a 20% correction could take years.
Now before you ultra-bulls start screaming and calling this a doom and gloom outlook, I have one question. Did you get out of your longs, including 401ks etc at the end of 2007? N0??!! Then SHUT-UP. Investing is not just about making money, its about not losing money. So based on the preceding paragraph, a top is arguably followed by 20% or more drop. Now lets define “Calling” the top. For some its like a logic puzzle, “If we hit point A before we go back to B, then C”. An example of this is GV who with some exceptions has been incredibly accurate with his technical analysis (http://www.iamgv.com/). Others like Binve (http://marketthoughtsandanalysis.blogspot.com/) have done incredible analysis on the fundamentals and have called the top based on value only to have been proven wrong…not his analysis but the market’s tie to the realities that he has discussed. Then there are those that think the consumer (is the GDP) is the market and has to be healthy before the market is healthy (http://caps.fool.com/Blogs/ViewPost.aspx?bpid=244126&t=01000748434556361960). However the interesting thing about Tops is they are rounded. Sometimes they are even double tops giving you a second chance. Therefore it doesn’t matter if you follow some EW guru and he misses by an ABC or an X. Or if you listen to valuation experts and miss out on a few points up the ladder. It doesn’t even matter if you listen to me and bail out leaving dollars on the table. The point is you are sitting safely out of harms way when it comes and make no mistake about it…it is coming.
Everything we have said so far applies to all markets. If you still own a house, then it is not an investment (which is OK), if it were an investment you would have sold it in 2007 and be buying it back next year with enough money to pay your taxes for life. Do you own rental property? It must be a hobby or would have sold it. Own Commercial Real Estate? Its not too late…you can sell and lease back if it’s your business and you will still be light years ahead. Problem comes when you are tied to your investments. While I am competent enough in RE and Equities to call tops, I don’t know precious metals or bonds well enough to own anything more than just small diversification holdings.
Yes it can be fun when your AMZN goes through the roof but it is a lot more important that you stay solvent to trade another day. Therefore “Calling the Top” is not just an exercise in blogmanship; it is a way to insure your success as an investor.