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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.

VP MACRO THEMATIC MARCH 2014 P.01

www.variantperception.com

SIGNS OF MARKET BOTTOMS AND TOPS

Market Bottom Signs

Market Top Signs

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

Wave of M&A and/or leveraged buyouts


Many low quality IPOs
Large share buybacks
Dividends are less common and capex surges
High degree of corporate leverage
Venture capitalists are viewed as heroes
Cash flow insufficient for many companies, but obtaining loans
Accounting becomes more questionable

Valuation

Valuation

Low price to sales and EV/EBITDA


PE's may be distorted by losses, but many very low
Many companies trading below book value
Many companies trading near net working capital

High Price to sales


CAPE Shiller PE high
Companies trade at many multiples of book value
Frequent vendor financing of working capital

Economic

Economic

Central banks have eased for at least six to twelve months


Building permits have declined for a year
Leading economic indicators are low but long leading rising
Recession declared officially, news is stale
ISM has been negative for months
ISM New Order to Inventory turns up

Market

Central banks tightening policy


Building permits are falling
Leading economic indicators turning down
Most economists doubt recession
ISM positive but turning negative
ISM New Order to Inventory Turns down

Market

Previous darling sectors are hated


Credit spreads are wide
Credit is tight and only available to high quality borrowers
Margin debt reduced and sharply negative year on year
Frequent episodes of high volume selling and panic
Yield curves have been steepening for months
Volatility is high for a sustained period
Closed end funds may trade at discounts to asset value
Six months of "distribution", i.e. more new lows
20 to 50 week won't turn up until rally has already started
Advance-Decline becomes more positive
Dow Market positive divergence
Market already down 20%
Coppock Signal turning up from very low position

Sentiment

Value managers are losing their reputation


Credit spreads are low but rising
Many bonds have low/junk ratings
High year over year increase in margin debt
Frequent days of climax buying
Yield curve is inverting or flattening
Volatility is low but rising
Closed end funds trade at premium
More new lows than new highs
20 week 50 week negative crossover
Advance-Decline turns negative
Dow Market Negative Divergences
Market in topping pattern
Coppock turning down, many stocks below 200 day moving avg

Sentiment

Investor are cautious and out of the market


No one is bullish
Front covers of newspapers and magazines are negative
Art and luxury stocks are hurt
Consumer sentiment is negative and depressed

Investors are momentum driven


Bears have given up
Front covers of newspapers and magazines are euphoric
Art market is booming as are luxuries
Consumer sentiment is falling from a high level
Financial press and TV becomes more popular

Source: Variant Perception

VP MACRO THEMATIC MARCH 2014 P.02

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