If you ask people on the street, or if you even ask the average investor how a market tops, you will likely get a number of reasons. Some will say that you need some form of event to shock market participants into selling. Others will say that corporate earnings have to turn lower for the market to top. And, others will say that it takes a downturn in economic indicators to turn the market down.
But, I am going to suggest to you that it is much simpler than all that.
You see, in its simplest terms, it is not selling that causes a market to top. Rather, markets top when there are no more buyers to push the market higher. In other words, when bullishness reaches an extreme, there are no more investors that are going to push the market higher, and then there is only one direction left for the market to go – and that is down.
So, what we need to understand is where investor sentiment resides in order to determine if we are approaching a market top. While I use Elliott Wave analysis to identify those market extremes, we can look to other evidence of extreme’s in bullishness to warn us that we are approaching a market top.
One of the better sentiment indicators out there – Jake Bernstein’s DSI – reached levels of 88 several times over the last week. And, when you consider that 85 is an extreme bullish indication, I think it is clear we are approaching nose bleed territory.
Moreover, it seems that investors have jumped into the market in a big way over the last week as we saw one of the largest weekly inflows into US Equities in 52 weeks [+$25B] and the 4th largest weekly inflow on record. So, based upon this evidence, it seems that market sentiment may have reached frothy levels.
While there are also other indications in my own Elliott Wave work that suggest we are likely hitting a market top in the coming week or two, it would seem that much of the evidence is starting to suggest that we are going to see a pullback as we move into April. The extent of the pullback is still in question, but I would personally like to see a drop back down to the 2200 region on the S&P 500 (SPX). However, I expect a return to at least the 2600 region at a minimum. And, based upon our Elliott Wave analysis, the manner in which the market takes shape as we drop to the 2600 SPX region will tell us if 2200 is still going to be our main target region.
That means that I expect that the next drop in the market can provide us with major buying opportunity which can point the market north of the 3500 SPX region by 2022/23, and generate gains of 40-80%, depending on the nature and depth of the pullback we expect in the coming months.