Japanese Equities

CHAPTER 4Market Tops and Bottoms

Experience tells us that guessing the top of the market is far easier than guessing the bottom of it. The market top usually shows up after a long climb. Of course, there is no clear definition as to how long the “long” should be. We could say, however, that when the market climbs to the top, various indicators begin to signal “overheat,” and at least for some short duration, and sometimes for some considerable duration, the market experiences a correction.

In contrast, even when “oversold” signals flash and we see temporary rebounds, in many cases the market will continue to correct. We may say that here again, human psyche is at work.

As the phrase “profit take” suggests, when we achieve certain returns (out of greed), fear begins to grip our soul. This is the first reason for a market correction. And once the correction begins, the fear amplifies, and unless investors see clear signals, they tend to stay away from the market. This may be the primary reason why it is difficult to guess the bottom of the market.

For humans, it may be easier to eradicate greed than fear. In this chapter, we will consider a few indicators that may tell us the top and bottom of the market, as we continue to struggle with greed and fear.

Volatility as Indicator

When the equity market rises steadily, after a while the market volatility drops to a level not seen or seldom seen in the past. This is a danger signal, and we may wish to check futures open interest levels ...