Identifying Tops and Bottoms


  • If a stock is making new highs and has gone into extended valuation and stays with 7% of this new high for the next 5 to 7 trading days then that high isn't a terminal top
  • The primary catalyst for creating the disequilibrium is any mechanism that can suck the liquidity out of the system
Last Leg to the Top:
  1. An already expensive stock leading the bull market showing no signs of correcting makes a big dash into its bull market peak moving 60% to 100% in three months, going from an outrageously expensive to a thoroughly bizarre valuation.
  2. None of the fundamental analysts cold justify the price three month before the final dash and certainly not at the peak as the stock defies all logic and reason while making new lifetime highs.
  3. Prices fail to hold at the top by more than a few hours, In most cases the top is made on intraday prices where the stock sees a sharp correction towards the close after having fallen vertically from its intraday high.
  • A dramatic rise of an already extended overvalued stock three months before the peak followed by a dramatic fall of the stock to an almost equivalent level of the price three months preceding the peak, signals a strong end to the long term bull market
  • A top will be formed even as the company will be declaring very good profits and growing at above average rates of growth while on the same logic, a bottom will be formed even while the company will be posting dismal results and many times fighting for its very existence
  • It makes sense to wait for the bottom at which point prices will move sideways and consolidate whereas for the top there is no second chance because if prices consolidate and remain at the top for a few days then that price is not a top whereas if prices retrace sharply downwards after hitting an already extended bull run in the circumstances listed above then the price that has been created could well be the top for several years to come
  • In terms of market dynamics:

  1. Valuations are most reasonable at the bottom with prices being justified mostly by the P/E ratio, dividend yield or a P/B ratio
  2. Public participation is minimum
  3. Leverage is very small or non-existent with minimum volatility and there is a sense of uneasy calm all around
  • Whenever unexpected bad results don't push stock prices down, its time to buy just as its time to sit back and ponder when unexpected good results can't take stock prices higher
Stocks to participate in the recovery

  • Auto > Banking > Industrial > Cyclicals


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