Market Technicals: When Do Markets Top?
Visitors ride a roller coaster in Valencia, California. (Photographer: Patrick T. Fallon/Bloomberg)

Market Technicals: When Do Markets Top?


The percentage of people who participate in the markets is said to be a very small number. Say, for a minute that it is x, but the number of people asking when the market will top would be something close to 10x! Where did these other 9x people come from, you wonder? Those are, typically, the vicarious participants of the market.

It is such an ironic aspect of the markets that when the markets are falling, the x active people are hoping that it would stop falling whereas the other 9x vicarious participants are always asking how much deeper will it go and many of them even have forecasts for how much lower! We all experienced that aspect, most recently in March 2020. Now markets are trading at all-time highs and the most asked question—from the entire 10x mind you—is when will a ‘correction’ come?

I mean, why don’t the 9x vicarious guys ask how much further will this keep going and give us some forecast for 1,00,000 Sensex? After all, that figure is not proprietary to Rakesh J alone, right? But no, everyone wants only to know when a correction is due, and when I run into these kinds of guys they ask me as if I know! Or I am supposed to know! And when I tell them I have no idea, they feel, kind of, cheated. And they go, yeh bolna nahin chahta hain! Boss, how can I tell you something that I cannot fathom, where I am as flummoxed as the next man? Then when I tell them something gyan-like, such as, ‘I am just following the trend’, they look at me strangely and I can almost hear them thinking, man, there he goes again!

The main point of this discussion is to highlight this business of catching the top of the market. So, okay, let’s look at this from another angle. All indicators are showing high optimism, in fact, extra high. The trailing PE is way up into outer space relative to where we used to be. Prices have gone about 14 days on a trot hitting new highs on each one of these 14 sessions.

The RSI has been in the overbought zone now for two and a half months!

The chart below shows the sequence of the market section moves that have had a high number of consecutive new highs.

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.

Bull market tops occur on a surge of extreme optimism. Almost every one of those surges in optimism has happened on the back of deterioration in fundamentals – both the economy as well as stocks.

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.

Doesn’t the near-vertical move of the present market mimic these great phases from the markets of the earlier decade?
Market Technicals: When Do Markets Top?

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?

The counter-argument to these is that each one of those legs was followed by a reasonably large correction. Yes, very much so. But prejudging when that correction shall emerge has been the undoing of many who failed to participate or sold off too early. The 2020 rise is no different. I have commented on that aspect too in earlier articles. I may have quoted this before but it is probably worth repeating, Sadhguru Jaggi Vasudev says “Out of fear of death, many people forget to live”. We can paraphrase that to the market to state, “out of fear of a correction, many people avoided participation!”

So, going back to what we started with, let’s not waste more time trying to figure when the dreaded correction is going to occur. It will come when it has to come. In the meanwhile, we know not how much more is left. The best way to address things is to use a trailing stop and jump into the fray—if you have not—or stay put. The charts will help you out on that. At this juncture, nothing else can I believe. There are many ways to skin that cat, depending on what type of player you are.

Market Technicals: When Do Markets Top?

Institutional guys like the 200 DMA. But they use it to buy in bull markets. Currently, the 200 DMA is at 11,310, about 22% below current levels. Does that fit for you? If not, get something else. Like a shorter moving average, say 50-day (at 13,480). Won’t work? Ok. How about a Super trend 3-10? That’s at 14,035. We can keep going, you know. But I trust you get the idea. Work out your own. And then dive in. Maybe it is already too late. Maybe there is lots more. Let’s leave that to the market.

CK Narayan is an expert in technical analysis; founder of Growth Avenues, Chartadvise and NeoTrader; and chief investment officer of Plus Delta Portfolios.

The views expressed here are those of the author, and do not necessarily represent the views of BloombergQuint or its editorial team.

Also read: 10 Trading Forecasts For 2021

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