Observing a Topping Process

For about a year now I’ve been talking about the broad market being in a topping process. Here’s another chart that speaks to the same issue:

Triple Top

We’ve had a brief discussion about whether we are at the end of a secular bear market or the beginning of a secular bull market. Well, the answer will be found in the next big correction. If we have in fact started a new cyclical bear market which I signaled about a month ago on MarketWatch, then we simply need to watch the bottom of it to know where things stand.

If the bottom of the next cyclical bear market is at or below the 2000 lows, then we were in fact still in a secular bear market. If we set a higher low, which I am pretty confident we will, then history will say that we started a new secular bull market in the summer of 2009. As it turns out, it doesn’t really matter to us as investors which is true, end of a secular bear or beginning of a secular bull, either way, if the stock market does drop 20-30% or more, we are going to get some great buying opportunities. 

Already in what has been a rolling cyclical bear market, that is running from sector to sector and from small caps up to mid caps so far, we are seeing great opportunities brought to us by the networked traders. The first opportunities were in energy where I was a bit over anxious and got in a little early. We are now seeing opportunities in biotech, semi-conductors and certain industry. There will be more in the coming quarters.

Leading Indicators

I was talking to a friend who owns a pretty good size regional trucking company while we handed out candy on Halloween and he was telling me how he has been channel checking to get more information about the slowdown in shipping. He’s convinced that we are about to see a very bad inventory cycle. He’s finding companies laying off and others holding back on purchases. 

Transports have typically been a very reliable indicator of developing trends in the broader stock market. Take a look at this:


Dow Transports

Now take a look at that with the S&P 500 over layed:


Transports S&P over lay

I know we always want to believe it’s different this time, but…

Keep an eye on the hedges I am putting in place. If you want to protect a portion of your portfolio, or outright speculate on a correction, you’ll have to be nimble, but I think we can make good money with some hedges. If you don’t want to trade, continue to hold 25% or more in cash in your brokerage accounts. My firm’s 401(k) Monitor service is holding 50% cash/intermediate term treasuries in the Balanced Growth portfolio which is what most people use.

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