How to Spot a Market Top
It’s fall again when my most loyal readers are to be found taking transcontinental railroad journeys, crossing the Atlantic in a first-class suite on the Queen Mary 2, or getting the early jump on the Caribbean beaches.
What better time to spend your trading profits than after all the kids have gone back to school and the summer vacation destination crush has subsided?
It’s an empty nester’s paradise.
Trading in the stock market is reflecting as much, with increasingly narrowing its range since the August 5 flash crash, and trading volumes are subsiding.
Is it really September already?
It’s as if through some weird, Rod Serling-type time flip, August became September, and September morphed into August. That’s why we got a rip-roaring August followed by a sleepy, boring September.
Welcome to the misplaced summer market.
I say all this because the longer the market moves sideways, the more investors get nervous and start bailing on their best-performing stocks.
The perma bears are always out there in force (it sells more newsletters), and with the memories of the 2008 and 2020 crashes still fresh and painful, the fears of a sudden market meltdown are constant and ever-present.
In the minds of many newly gun-shy traders, the next 1,000-point flash crash is only an opening away.
In fact, nothing could be further from the truth.
What we are seeing unfold here is not the PRICE correction that people are used to but a TIME correction, where the averages move sideways for a while, in this case, a few months.
Eventually, the moving averages catch up, and it is off to the races once again.
The reality is that there is a far greater risk of an impending market melt-up than a meltdown. But to understand why, we must delve further into history and then the fundamentals.
For a start, many investors have not believed in this bull market for a nanosecond from the very beginning. They have been pouring their new cash into the generous 5% yielding bond market instead.
Some 95% of active managers are underperforming their benchmark indexes this year, the lowest level since 1997, compared to only 76% in a normal year.
Therefore, this stock market has “CHASE” written all over it.
Too many managers have only three months left to make their years, lest they spend 2025 driving a taxi for Uber and handing out free bottles of water. The rest of 2025 will be one giant “beta” (outperformance) chase.
You can’t blame these guys for being scared. My late mentor, Morgan Stanley’s money management guru Barton Biggs, taught me that bull markets climb a never-ending wall of worry. And what a wall it has been.
Worry has certainly been in abundance this year, with China collapsing, Gaza exploding, Ukraine and now Russia invaded, the contentious presidential elections looming, oil in free fall, and the worst fire season in decades.
When in doubt, Jay Powell is all about easy money until proven otherwise. Until then, think lower rates for longer, especially on the heels of a disappointing weak August Nonfarm Payroll Report.
So, I think we have a nice setup here going into Q4. It could be a Q4 2023 lite-- a gain of 5%-10% in a cloud of dust.
The sector leaders will be the usual suspects: big technology names, health care, and biotech (IBB). Banks like (BAC), (JPM), (KBE) will get a steroid shot from rising interest rates, no matter how gradual.
To add some spice to your portfolio (perhaps at the cost of some sleepless nights), you can dally in some big momentum names, like Tesla (TSLA), Netflix (NFLX), DH Horton (DHI), Lennar Housing (LEN), and Facebook (FB).
