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Timing A Market Top Takes A Great Deal Of Luck

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by: Bruce Wilds
Bruce Wilds
Long/short equity, long-term horizon, commodities, currencies

Those who claim they will be able to predict a market top or crash are often delusional. Even after a market begins to tumble it often reverses and can tear the face off traders convinced they are on a one way street to riches. Only time and looking back in the rear-view mirror confirm what course the market has chosen to take. Timing a market collapse is no easy task and more than once like many market bears I have found myself writing an article predicting the wrath of reality was about to descend upon the economy to be disappointed by a bull market that seems to defy gravity and logic.

Bull market winding down. Don't panic - 2013

Those of us who have doubted and repeatedly predicted the collapse of this so-called recovery remain wrong because we have underestimated both the breadth and size of the global intervention of central banks and governments. Nobody in their right mind would have ever anticipated the sheer magnitude and scope of what has become a worldwide phenomenon. Still, considering that since 2008 growth has been built on a mountain of debt, it is a challenge to become excited and simply go with the flow. Those of us who truly understand the nature of debt and have seen the destruction it can wield fear and respect its power.

Most people work hard for their money and even harder to save a bit of it but they are often lulled into complacency when it comes to protecting it. One of the saddest things to witness is when someone who has worked very hard suddenly becomes penniless because an investment or economy turns south. I'm reminded of Ernest Hemingway's line from The Sun Also Rises, "How did you go bankrupt?" "Two ways, gradually and then suddenly." It can be used to describe just how wicked markets can be. We should remember the stock market has far exceeded the upside expectations of many bulls while the economy has not fared nearly as well in many respects.

Timing a market top is difficult, the question I again put forth is, are we reaching the turning point? A turning point can signify a historic or watershed event that is looked back on and commented upon for years, market crashes, the great depression, major economic shifts can fall into this category. In the past, I have written about the unpredictability of predictions and how a random black swan crashing through your front window plays havoc with the idea of always and never. For a decade America and much of the world has been washed along on a wave of freshly printed money and low interest rates and while many people think it has ended, just last week the Peoples Bank Of China unleashed more support to the Chinese market.

This Chart Screams Confusion Clear And Simple

Auto sales and lease programs have flourished and housing has also been pushed along by artificially low-interest rates that distort what might be called the natural laws of economic order. The historically low interest rates have also masked inflation by lowering payments on loans and debt. In a free market, the law of supply and demand is left to efficiently allocate capital and in doing so determine true market value and price discovery. When you factor in the corrupting force of stock buybacks ushered in by the recently passed tax package, those in power have temporarily masked reality and the serious structural problems within the economy.

Several strong reasons exist to be pessimistic about the economy going forward. Washington has failed to make the reforms necessary to make America more competitive and consumers are not in a position to spend the economy forward because a large number of Americans have dropped out of the workforce or chosen to only work part-time often at jobs that pay poorly with few or no benefits. This comes at a time many retails stores are closing under the assault of growing online sales aided by our very own United States Parcel Service delivering packages under cost and even on Sundays. Sadly, the only sector guaranteed to be strong is defense based on government spending, but that is not enough to carry us forward.

Circling back to the main theme of this piece, which centers on just how difficult it is to time a market top and how costly being wrong can be, it should be pointed out that in many ways the stakes have been raised and are much higher than usual in this cycle because it has gone longer and farther than most investors expected. Two things are certain - the first is most traders are a bit nervous following the market action last week and the next few days will be fraught with uncertainty. This translates into the idea markets may be volatile and caution is in order. Remember at some point "buy the dip" will become the kiss of death.

Footnote; In my readings today I happened to cross a passage on another blog where the writer speculated the "Three Amigos of Collapse" might be ready to converge; he described these as Murphy's law meets the law of unintended consequences and the law of diminishing returns. The piece below written in February questions whether it was "Too Early To Call A Market Top?" We now know it was, but we have not been blessed with much in the way of good news since that time. The link to that article can be found here.