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THEMATIC
Understanding
Market Tops
March 2014
Contents
Introduction:
Framework
for
Understanding Tops ........................ 2
Previous Market Tops: a Quick
Overview ......................................... 6
Corporate Activity: Were Seeing
Typical Signs of Market Tops .......... 7
Credit Signs of a Top: Today Lots of
Junk Debt and Very Low Quality.... 13
Valuation: Rarely Has the US Market
Been So Overvalued ..................... 16
Economic signs: So Far no Downturn
of Leading Indicators ..................... 21
Market Technicals: So Far No Signs
of a Sick Market ............................ 24
Sentiment: Surveys Extremely Bullish
and Few Bears .............................. 25
Putting it All Together .................... 28
In this report, we will outline how to recognize market tops when they occur.
Every market top is slightly different, but they always have many things in
common. There are always tell-tale signs in economic data, market
sentiment, capital markets activity, corporate actions, etc. We will look at
historical market tops: 2007, 2000, 1990, 1980, 1976, and 1972. We will then
look at the current market and see how today compares and what we can
learn from that. We hope this research report will be a blueprint and a useful
tool for investors for years to come.
Today the market shows many of the elements that are present near market
tops. In particular, sentiment is extremely bullish, investors are very long and
leveraged, and valuations are extended on a wide variety of measures.
However, leading economic indicators are still not negative, and so far
breadth and technicals have not deteriorated. Medium term stock market
returns are likely to be negative due to excessive valuation, but there is
no imminent sign of a market top. We would need to see a deterioration
of our leading indicators before calling a market top.
In the following table, we summarize the characteristics of market bottoms
and tops. The table is a very useful checklist that investors can print and
consult as events unfold in markets around the world. Clearly, many signs of
a top are in place, but there are many characteristics that are currently
missing. This report looks in detail at each of the signs: corporate, valuation,
economic, market and sentiment.
If you would like to receive a full report, please contact us here.
www.variantperception.com
Corporate
Corporate
Almost no M&A
Almost no IPOs
Almost no share buybacks
Dividends are cut and capex reduced
Corporations focus on deleveraging
Almost no new money for venture capital
Many bankruptcies and much distress
Companies restate financials and write down assets
Valuation
Valuation
Economic
Economic
Market
Market
Sentiment
Sentiment