Identifying A Top

Bottoms are much easier for me to identify than tops. At bottoms the doom and gloom is thick and the fear and panic is in the air. All one has to do is close their eyes, buy and hold on. It also helps that many of the sentiment indicators work better at bottoms. Extreme optimism has the potential to last longer than extreme pessimism.

Just because it is more difficult to identify a top than a bottom it does not mean that trying to identify a top is a fruitless endeavor. The more signs of a top that are present, the less favorable the risk/reward is in the market. Unfortunately most prefer to deal in binary outcomes rather than probabilistic outcomes. Most people don't want to hear that the risk/reward proposition of owning stocks  is declining. They just want to know if the market is going to go up or down.

The way I see it the risk/reward proposition of buying stocks now is low. While I could see the current rally lasting another week, there are enough signs of a top present such that it would not surprise me to see a correction start this week. Tactically, I have been using strength to reduce my net long position and will use further strength to continue doing so.

1 comment:

Weekend Reading – Finance & Investing Links for 1-28-12 said...

[...] Bottoms are much easier to identify than tops. – Capital Observer [...]