The topping process for stock markets takes time to develop. It is a time when the professionals are slowly selling out of their positions to other investors. Mutual funds often provide a good target, since they need to stay invested. Index funds just try to perform in line with the markets, whether up or down. Let’s take a look at the 2009 market crash….
As you can see, a top was being formed over a period of time. The point and figure chart chart gave a price objective of 676 for the S & P 500. Not a bad tool considering that the actual bottom occurred at 666 (strange number).
Markets just don’t collapse from a top, without some distribution. This distribution area is where informed forces sell stocks or futures and less informed forces tend to buy. If you look at the current bull market, you can see that there has not been a top formation, but the upside move looks pretty extended. Hence, my belief that we will more than likely enter a bubble phase over the next six months and a subsequent top formation. If not a bubble phase, perhaps a sideways move at or slightly above where we currently are at. The point is that it will take some time to distribute that stock from stronger hands to weaker hands. With stocks in weaker hands a bear market is easier to unfold.
If you look at today’s markets, there is little to identify as distribution, though politics can move the markets in strange ways. The reaction to the turmoil over North Korea is a chance for the markets to correct their most recent gains. A consolidation to the 2200 level in the S & P is possible, though unlikely. The topping process in 2008 took about 6 months. Perhaps this time it will be shorter, it is hard to determine, you just have to follow the markets. The longer the distribution the more severe the correction.