The earliest of pundits trying to pick the top is Barron's Alan Abelson. I write earliest because he has been trying to pick tops for decades, so his opinion, in my mind, almost doesn't count. Not so amazingly his column for this week on the conditions of things equity is entitled "Signs of a Top?" In addition to promoting his ad nauseam bearish opinion, he manages to source some "old buddy", a "peerless technical analyst" (his wording) who also sees a stock market top right around the corner. To add sizzle to this "top" call, he keeps his source Anonymous (!!!). What bunk.
Seriously, I put my name to every set up you read here! Almost every day we contributors are sticking our proverbial necks out as we attempt the most difficult of all things financial, i.e., finding stocks, ETFs and indices that show promising set ups to trade in order to grow your account balances. Nothing we do here is clandestine, hyped and is especially not anonymous! On the subject of stock market "tops", one cannot be so vague when making that type of call because of the various factors relating to "tops". Those factors include the time frame of the top (short, intermediate or long term); the severity of the top (how much is this going to hurt my longs?!?); and the reasoning behind the call (other than "gee, things look expensive up here!"). For options traders, tops are not a bad thing as we can also play the downside game via puts and synthetic puts, ETFs dedicated to shorting and alternative option equity strategies. Thus "yelling top" for the older generation in order to sell a financial newspaper or to get their attention to watch the "ugliness" on financial TV does not work in our modern, mature trading world as things "gone ugly" can be quite pleasing to you if you are positioned with your trades to take advantage of that chaos.
The ONE KEY ELEMENT missing in all this "top calling" extant now is the "euphoria" associated with a decent top! Extended stock market rallies that become unappreciated and belittled bull markets that last for longer than months reach their zenith at the emotional point where most of those involved are in a state of euphoria. Even our recent real estate debacle fits this rule as most folks who were playing that financial game never expected that the top was in and the roof was literally about to fall on them until it was way too late to get out. Euphoria, that false sense of well being, was so deeply set, the hook being greed and lack of any sense of risk. Now, make a mental jump to our current stock market's emotional condition and you immediately note nary any similar euphoria, regardless of what some anonymous technical analyst is seeing on his charts!
The stock market moves through four stages of the emotional cycle, ad infinitum. Those stages are: 1) despair; 2) optimism; 3) euphoria; and 4) hope. We have recently survived "despair" as stock prices will attest. Slowly but surely optimism is growing, albeit at a snail's pace. Euphoria is so far from being a reality that even the thought of things financially euphoric is laughable right now. And, as for hope (not to be confused with its mirror image that is optimism) you will find that killer emotion at the door of despair.
The stock market is not euphoric now, and will probably not be so for months if not years to come! Thus, any tops that the stock market might make over the next several quarters should be buying opportunities and not the end of the world as we know it in the 21st century! Doubtless the "perma bears" will make hay of any decent amount of stock market decline as they feed on such as do all vultures. Financial television will also embrace the "ugliness" as their form of modern financial "yellow journalism" has created a syllogistic logic that perpetuates things bearish. What most likely will not be broadcast is the point and time to cover any profitable short sales, and especially the point and time to get long!
To quote "Peter O'Toole" as he played T.E. Lawrence in that great classic movie "Lawrence of Arabia", "Nothing is written!" Nothing is written for the stock market too! Nothing being predicted for 2011 is worth the time to read it. No one can consistently predict stock, bond, gold, oil, whatever prices much further than a few months hence. The more confident the longer-term predictions the more erroneous they will most likely be.
The longer the analyst's report, the more likely it is wrong. Thus the 600 or so pages of Ms. Whitney's municipal bond dire warning clarion call is so noted. (The size of the report being inversely equal to its efficacy lies in the fact that the more that is known about anything financial, the more likely it has already been discounted!). I can still recall reading the several hundred page report written by Edson Gould, a hugely bullish synopsis of the stock market going to record highs, the market that year then dropping a nasty 20% post Gould's prognostications (late 1970s). Another 100 page report recalled by my aging memory was a very bullish fundamental analysis on the prospects for copper in the forthcoming year (mid 1970s). Copper was around $0.88. The report prognosticated a doubling in price over the forthcoming year. Copper that forthcoming year then tanked to around $0.40. Futures traders bullish got slaughtered. Both reports were rather expensive to purchase, both before and after acquiring them. The theory lives on, alive and in play. Caveat emptor anything prognosticating the long term!
I have no set up for you today as I too need to see how trading will shape itself in the first few days of the year 2011. No matter what is about to transpire, I relish in the arena as we who love the world of trading can only know just how much we enjoy this ultimate game!
Skip is a former registered options trader and member of the Philadelphia Stock Exchange. He was an equity options analyst and broker with Paine Webber and a proprietary trader for Van Der Moolen. He served in the USMC, as well as played minor league baseball with the N.Y. Yankees organization. He is an independent stock and options market consultant.
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