IS AN APRIL MARKET TOP AT ALL POSSIBLE?
There are a variety of market theories and philosophies that I have discussed over the past 26 months on this website. One of the aspects of market behavior I have discussed briefly in the past is the fact that the market will not ring a bell for investors at important tops. In other words, market tops are devoid of fundamental information that will allow investors to rationally or logically assess that a pullback is forthcoming.
It is only after many months or sometimes years, that investors realize the deterioration that was taking place beneath the seemingly bullish picture that was being painted. Very few are aware to the point of being able to realize that the tickets they are buying are not worth the paper they are printed on.
In 2013, there has been a consistent pattern of anticipation of the end to this rally. During January, the perceived excuse was uncertainty in the earnings picture. During February, we had a convincing seasonal pattern that pointed to an impending top, along with various technical confirmations. The ides of March have now come and gone without much of a hiccup in the persistent buying. Now we are coming up on April, which is earnings report season for most U.S. companies.
If you are looking for a top in April, then there are two obvious fundamental scenarios that drive your conclusion:
1. Earnings will come in worse than expected, causing market participants to realize that they have driven equity prices too far forward
OR
2. Earnings will be inline or better than expected, with the reaction being to sell on the news
Scenario #1 is as brilliant and far reaching a bell sounding for investors as can be. Earnings come in surprisingly weak, allowing investors to have a logical set of fundamental data from which they can make seemingly logical decisions to cash in at record high prices. I don't see Big Bird walking around because this isn't Sesame Street. 1+1 does not equal 2 here. It equals 5 and sometimes 48. Just depends. To assume that the market is going to give investors a logical set of data for which to make simple assessments to sell is to assume that the pricing mechanism within the markets is friendly in nature.
Scenario #2 has to be given a bit more credibility than the first. The only problem I have with this scenario is that participants remain obsessed with finding a top to this rally. A sell on the news scenario, while being a crude means of exercising unexpected mental anguish upon investors 15 years ago, is an outdated and obvious form of torture today. Sell on the news is the stock market equivalent of Nelly or Ja Rule. Played out, tired and predictable.
The point here is that both scenario #1 and #2 will be expected, planned and easily avoided by investors. Market participants are sophisticated to the point that ringing the proverbial bell at the top doesn't simply have to mean a fundamental news event. It can be something much more abstract than previously thought, such as a concept like "sell on the news." We can call this a more advanced concept of bell ringing.
For that reason, this market has no choice but to see any top occur when there is a complete absence of fundamental drivers, whether straightforward, contrary or otherwise. Where does that leave us?
Cue the suspenseful music.......................................
May.
