Friday, October 27, 2006

How I Know a Top is Forming: An Office Conversation and a Perma-Bull

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I've had my suspicions that a top is forming for quite some time, and now I am sure of it. This ain't the beginning of a bull run, it's the end (at least for the short term). Here's my evidence.

I'm sitting at my desk minding my own business, when one of my co-workers, Jane, who is very cautious with her money, stops by to chat:

Jane: You invest in stocks don't you?
Me: No, I trade stocks, I dont' invest.
Jane: What's the difference?
Me: Well, I generally hold stocks short term, from 2 days to a
few months.

Jane: So you basically gamble?
Me: No, I use technical analysis, which
gives me an "edge". I also use sound money management and focus on position
sizing and risk.

Jane: Um, well, anyway, I'm taking a big chunk money out of
retirement since the Dow is making record highs.

At this point, I almost warned her about market breadth, volume, Dow Theory, the lagging transports and sentiment readings. However, since the conversation was off to such a poor start, and I generally try to tone down the geek factor at work, I decided to just tell her to be careful and do some research first. We then had a deep conversation about this week's Lost episode (which, by the way, was awesome).

The significance of this is, it's my first "personal real world clue" that we are near a top. When conservative Jane is ready to cash in her retirement savings and poor it into the market, you know the good times are about to end. Remember, this does not mean it's time to go all-in short, since tops take time to form. However, it is a sign that we need to temper our bullishness and be prepared for a fall. I'll have my short watchlists ready!

Speaking of shorts, Tim Knight's blog is a fun read. Known to the blogging world as a "perma-bear", Tim carries his emotions on his sleeves and in his blog. Tim seems to be getting more and more frustrated with this bull market, and has started putting on some long positions. Could this be another sign that a top is forming? Afterall, tops don't form until the last of the bears give up and go with the "if you can't beat em, join em" philosophy.


dean said...

i would respect your comments more if you knew the difference between poor and pour.

Rob said...

Hey, give the guy a break. His comments are insightful, even if he misused a homonym.

The Market Speculator said...
This comment has been removed by a blog administrator.
The Market Speculator said...

I think you may want to go back to grade school.