Folly of Calling Tops

It's really amazing how many people attempt to pick stock market tops versus how few attempt to call the bottom. What the heck is that all about? Is there an embedded doomsday strand of DNA pulsating throughout our bodies seeking to find fault and subsequent disaster?

Do you secretly hope your neighbors' gory holiday lights short circuit and burn out? Do you root for that arrogant athlete to trip or get knocked out in the first round by a 10 to 1 underdog? Do you laugh when the obnoxious waiter drops a tray of food?

What is it that we have to find things to hate against even when there is no real personal gain when bad things happen to the target(s) of our ire? It's really amazing, but it's truly human. Heck, when it comes to the stock market people rooting for a fall would take a financial hit - directly or indirectly - and yet they can't wait for the next crash.

Schadenfrude: (German) to take pleasure in the misfortunes of others.

Some people calling a top in the stock market legitimately think stocks (A) have come too far too fast, (B) are overvalued or (C) are only up because the Fed has been so accommodative. It's fine to have such opinions; that's what makes markets, opinions and people acting on those opinions. For me, however, rarely has any one that falls under the three scenarios above done much fundamental research beyond the use of traditional valuation metrics.

At this level calling the top seems like a no-brainer. Of course that's the way it seemed at Dow 8,000, 9,000, 10,000, 11,000, 12,000, 13,000, 14,000 and now at 15,000—one day you'll be right ... sort of. For me the real question is what's the strategy? Should people sell everything and hide out on a bomb shelter? How about selling everything and buying gold only? How about selling everything and joining the French Foreign Legion? What's the game plan other than taking a victory lap after missing 9,000 points on the upside for a 1,000 move to the downside (and I don't see that happening for a long time)?

Investors hear a lot of negative noise from a lot of sources including that internal strand of DNA that's innately seeking bad things.

Many are familiar with the Time magazine cover jinx that seems to have a shift in the fortunes of the people that grace its cover. The same jinx/curse has haunted those on the cover of other magazines and Madden NFL video games. Sometimes that kind of thing can work in reverse like when Business Week boldly wrote about the death of equities because of runaway inflation. Well, I guess the editors didn't count on President Reagan and Federal Reserve Chairman Volker who tackled the economy with a tough-love agenda through fiscal and monetary policy.

What is interesting about inflation is how the Fed thinks it will save our economy, including the stock market today (In fact, I found the most interesting part of Bullard's comments yesterday that pulled the market out of its nosedive was about the Fed's target inflation rate being met. These guys want inflation, at least a certain amount). Writing books about doom and gloom is a great way to make a lot of money and sooner or later we hit rough patches and authors and other curmudgeons get to strut their stuff. It doesn't matter how long they were wrong, only that fear and panic are in the air and blood on the streets.

In many ways it's a lot better to call for an end of the stock market than to call for an end of the world because even if the latter comes true, how could the prophet take a victory lap. On the other hand, we had a 24-hour sell off that saw a 1.5% pullback from all-time highs, and the merchants of economic death were celebrating as if they just caught a former dictator trying to race out of the country wearing a women's wig. There is one thing to consider before buying the worst-case scenario for sale these days. Sooner or later there will be a rough patch, but in the history of America it's always been temporary.

Since we're on the topic, a reasonable pullback in the market could make the Dow pull back to its 50 day moving average (exponential) of 14,763 where it must hold or be vulnerable to 13,891 where it must hold or trigger widespread panic. For now, I'm not worried about a crash, but that could change if Business Week decides to feature "Dow 20,000" on its next magazine cover.