Note on Stock Market Tops

Dear family,

This is the beginning of the end. Something will happen to change things quite soon.

Market tops are not like bottoms. The market slows and flattens instead of speeding up and spiking down.

Topping is a process – not an event.. So timing a top is more difficult.

You have to listen to what the market is saying. Just as trending is a process and at any level the market story has a beginning, a middle, and an end – so tops can only come at the end of the market process.

The end is described by some clearly defined and reliable metrics.(The same ones that got us in in March 9-10 2009) Those metrics are showing the end of this cycle approaching.

The metrics are also showing the end for the long view of markets starting back in the 1930s. Here too the long beginning, longer middle and long end have happened. This makes this ending much more important than 2000, 2007.

There are three clusters of dates for a top. October 13-20, December 15-25 and next April May. They might each be a top or only one, or two. Tops can be dictated by noise rather than the trend. Although there is sometimes a clear blow off top it is rarer than the other sort.

Different markets can top at different times. So this increases the feeling of a process. Risky markets can top first (Nasdaq 3-2000) while the rest of the market tops later (S&P 9-2000).

Symmetry implies, but this time doesn’t require, a double top.

Other markets will tell. Currency markets might turn a couple of weeks or so beforehand. Risk will be overbought here too, and investors will turn to less risk.

For those in since the beginning (like all of us) best is to recognize the inevitability of increasing vol. (Buy it). And go flat on every metric of risk. Our task is to conserve wealth in downturns and make it in upturns – so far job done!

Concretely sell Euro for Chf. (and potentially dollars). Sell stocks for cash and sell all risk bonds for cash. How much further can the spread between European junk and the 10year or bund decline? German state bonds should do well (even from here….)

We might be there, we might not be there quite yet. We wont be wrong but we might be early. I like to be early. But the process starts now………

HH