How You Can Identify Stock Market Tops

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How You Can Identify Stock Market Tops

When market indexes peak and begin major reversals, individual investors should take action immediately and raise 25% or more cash by selling stocks at the market prices (use of price limits on orders is not generally recommended). Lightning action is even more critical if your stock account is on margin. If your portfolio is 50% margined with half of the money in your stocks borrowed from your broker, a 20% decline in the price of your stocks will cause you to lose 40% of your money.

Don't wait around after the first few definite indications of a general market top. Sell quickly before real weakness develops.

Napoleon once wrote that he never hesitated in the battlefield and thereby gained an advantage over opponents. For many years he was undefeated in battle. Similarly, in the market battlefield there are the quick and there are the dead!

General market top reversals are usually late signals—the last straw before a cave-in. In most cases, distribution or selling in individual market leaders has, for days or even weeks, preceded the approaching market break. Use of individual stock selling rules, which we will discuss in the next two chapters, should lead you to sell one or two of your stocks on the way up just prior to the general market peak.

After the top, poor market rallies and rally failures in the averages will occur. Further selling is advisable when these weak rallies or rally failures are recognized.
If you miss the S&P or Dow Jones topping signals, which is exceedingly easy to do since they occur on only one or two days, you will be wrong on the direction of the market and wrong on almost everything you do.

Recognizing when the market has hit a top or bottomed out is 50% of the whole complicated ball game. It is also the key investing skill that all-too-many professional and amateur investors seem to lack.

You can also try to plan ahead and write down on charts, based on the market's historical precedent, where you expect the Dow to go and when the rally or decline might end. But it is best to watch the market, as it will eventually tell you when the correction or uptrend is finally completed.