The indices continue to hit new all-time highs on thin holiday trading. It is hard to look at the chart of the S&P 500 and not wonder if this one-way action can continue much longer. By most every technical measure it is technically extended and ripe for a correction.
The problem is that you could have made the same observation for weeks and it wouldn't prove very helpful. The positive momentum has crushed all the rational negative arguments and the constant talk about a potential China trade deal prevents any real downside from building.
So how do you navigate this action? Some pundits believe that you should anticipate a turn based on a variety of factors. This has proven to be highly ineffective and carries heavy opportunity cost. If you have stayed with the trend rather than tried to anticipate when it would end, you would have a large cushion of profits to offset losses you might realize when a market top finally does hit.
The best advice I can give to someone trying to navigate a market top is to stop trying to be too precise. You don't need to nail the exact turning point. That focus is what drives people to be too anticipatory. You can't nail the exact top after the fact. You can only do it prospectively and that is what leads to poor timing.
It is far better to wait for some poor action to occur before you become negative. Yes, you may suffer some losses by buying long at the top but the easiest solution to that is to quickly sell and keep those losses small.
My approach to timing a market top are as follows:
- Embrace the fact that I can't predict when a top will occur.
- Stick with the trend and make as much money as I can.
- When my stocks start to act poorly and I'm seeing losses then sell them.
There is no need to formulate complex arguments for why a downtrend is about to occur. The best warning signs of a problem are actual losses. Don't fear the idea of being caught long at the top. I know I will have long positions when the market finally tops out and I know I will have some losses. I can deal with that especially if I have been racking up gains rather than sitting in cash, hoping that the market will do what I want.
Don't be anticipatory. Focus on price action. It is that simple.