Market Technicals: When Do Markets Top?

We got four on a trot since September 2020. When I tried to search for similar situations from the past five years, I couldn’t find any! Yes, there were some segments that did have 10-12 bars on a trot but never four segments back to back! I doubt if I extend my search further back that I will find something like this. So while the question as to when a reaction will emerge is natural, one must also wonder why such an unusual pattern is being seen.

Of course, everyone has a pat answer on this – FII liquidity. I have dealt with this by-now-worn-out cliché and I also spoke about the additional liquidity from the Corona traders. But, 48 sessions of higher high prints –not consecutive, cumulative? That does boggle the mind, sir, as the legendary Jeeves would say.

Tactical optimism, such as the one we are witnessing currently, can continue to stretch as the markets keep pulling back from declining attempts. However, sentiment has been moulded, through the years, on periodic volatility, pullbacks, consolidations that make up the trends. So, sustained uptrends with no volatility and no pullbacks, and no consolidations over a nine-month period are certainly not the way ‘it is supposed to be’. When you have those 'normal' elements, most participants are able to come with their estimations of valuations, assess their risk, and create the appropriate exposure. But such sustained market strength, even in the face of what seemed like economic Armageddon not long ago, has confounded everyone.

Is that the case here? I don’t find it to be so. Not yet.

The broad market scenario has to deteriorate for the public and institutional optimism to become a factor for reversal. But nothing of that sort is happening. Indeed, there are many markets across the globe—not just equities—that are in the thick of bull markets, driven, probably, by the ‘wall of worry’ sentiment. The liquidity flush, also across the world, is owing to loose monetary policy everywhere. The recovery from the pandemic effects is providing a tailwind for the continued momentum in stock prices. The number of participants in the markets has increased substantially owing to the work-from-home situation and general loss of business or employment. These are not signs of deterioration of the broad markets and economy. What we, therefore, refer to as ‘excessive optimism’ is not really so except for set ups that we have been used to. In last week’s article, I had mentioned how paradigms are changing on all these.

Coming to charts, people’s memories are short. We have been here, but seem to have forgotten it, that’s all. I am showing a chart of some bullish sections of the long bull market we had in the last decade. From around the low in 2003-4, we had strong up moves, in each of the subsequent years until the markets topped out in early 2008. Look at the dynamic nature of each of those moves! Do you recall any of them?

I can see them because I look at the charts. However, despite having lived through each of those legs and participated fully, I too don’t recall them. Memories, as I said earlier, are short. Reminds me of a wise man’s saying, Even the bluntest pencil is better than the sharpest mind! Charts are such wonderful things because they capture the action and allow us to look at it later to keep current actions in a proper perspective.

For the record, 2004 saw a 47% rise, 2005 was 41%, 2006 at 63%, and 2007 had 62%. The current rise in 2020 is 95%. Certainly higher but not out of the stadium either. Maybe this time we will have the first leg the longest and the rest of the legs shorter? Who knows?