3 Unusual Ways to Tell the Stock Market Is Headed for a Fall
There are three types of market tops every investor needs to pay attention to: short-term tops, intermediate tops and long-term tops, the last of which signals the end of a bull market. But no matter what time frame you're talking about, tops don't just materialize in a day. They take weeks and, in some cases, months to form -- but often, the clues that show one is coming aren't obvious until after it arrives.
Unfortunately, identifying a market top in hindsight doesn't help protect your investments. It's far more important to know when a top is forming so that you can take money off the table and reduce your risk exposure before the market drops.
Economists and market technicians will suggest all sorts of metrics and data points to use when trying to determine if the stock market is topping, %VIRTUAL-WSSCourseInline-1038%but in general, they're the same ones that everybody uses. If you want to get ahead of the crowd, you need to think outside the box. Over the years, I've found a number of unusual indicators which, when used in conjunction with traditional indicators, can give you an edge at spotting an imminent market top.
The Magazine Cover Indicator
This is a subjective indicator based on the cover stories of several major financial publications. The theory is that by the time one of them proclaims a bull market on the cover, that information is already so widely known that the market is destined to underperform; or, in the case of a bear market, outperform.
One example of this indicator is a 1979 BusinessWeek cover story titled "The Death of Equities." At the time the article was written, the market had experienced a rough decade, and the Dow was trading at 800. However, 1979 turned out to be a turning point for the markets. That year began an incredible 20-year bull run that didn't end until the Internet bubble burst in 1999.
Although financial magazines aren't as influential as they once were, the modern version of this indicator is when mass media, especially social media, begins talking about the market as if it can never go down. That's when you want to be cautious about putting new money to work in your portfolio.
The Bookshelf Indicator
The first time I became aware of this indicator was in the late 1980s, when after Black Monday -- where the market dropped 23 percent in one day -- bookstores reduced the number of investing-related titles on their shelves. The same thing occurred in the late 1990s when my local bookseller had five shelves of investing- and stock market-related titles for sale. Just a few months after the dot-com crash, they barely carried a full shelf's worth.
Again, bricks-and-mortar bookstores don't have the same muscle they once did, but you can see this phenomenon play out by watching the number of weekly releases on Amazon in these same categories.
Another subset of this indicator is based on the tone of the book titles. The more brash and definitive the authors are, the more likely it is that a top is nearing. The archetype for this indicator is the book "Dow 36,000: The New Strategy for Profiting From the Coming Rise in the Stock Market," which was published in November of 2000, right at a major market top.
The Dentist Indicator
In 1929, Joseph P. Kennedy, father of future President John F. Kennedy, decided to sell all his stock holdings -- and in fact went heavily short the market -- making him one of the few people who actually increased their wealth during the stock market crash that began the Great Depression.
The catalyst for his move was the day he got a stock tip from his shoeshine boy. %VIRTUAL-article-sponsoredlinks% Kennedy reasoned that if even shoeshine boys were giving out stock tips, the market had reached euphoric levels and was too popular for its own good.
The profession associated with this indicator has evolved with the times. Today, they say, listen to your dentist. The theory is that dentists are too busy filling cavities and such every day to pay attention to the stock market. Unlike those of us who spend our days in front of computers, your dentist is focused on people's mouths -- for the most part, he'll only know what he hears from his patients. By the time he starts passing stock tips on to you, once again, equities are too popular for their own good.
I have a spin on this, which I call the "mother indicator." When my mother, or any other person who normally never pays any attention to the markets or investing, starts to tell me about buying stocks, I get real nervous, real quick.
None of these indicators, or any indicator for that matter, can definitively tell you when the market is topping, but they can provide you additional information that you can use when trying to evaluate the market's health.
No man is an island, or even a peninsula, so I encourage your feedback in the comments below. And don't forget to pick up my book, "Trading: The Best of the Best - Top Trading Tips for Our Time" via Amazon.