Measurements at the Top of a Market

By Brad Thomason, CPA

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The big question in the investing world at the moment is whether or not the US stock market has reached a top.
 
Let me give you some quick perspective on how the Pros are looking at this.  Then we’ll talk about why that may not be all that important to you.
 
The Pros are looking at the recent past and doing some simple measurements to try to get some sense of what is going to happen next.  Some say that these chart patterns simply don’t matter.  Others point out that if even just a few people transact based on what they say – whether they should have or not – then the patterns become a sort of self-fulfilling prophecy which really does affect market behavior.  As such, they are worth looking at.
 
If you look at a graph of the last 6 months, a couple of things will jump out at you right away.  Back in late January we saw the prices go as high as they’ve ever been.  On the Dow, about 26,600.  Then, a couple of weeks later, in early February, we saw a pretty sharp drop down to around 23,800.  Since then, the price has been bouncing around in between.
 
The Pros, in simplest terms, are looking at each of those points as lines in the sand; and they are waiting to see which line gets crossed first.  If the prices can move away from the low, and keep climbing once they reach that line at 26,600, then the hope is they’ll keep going even higher.  The Bull will still be running. 
 
But if the prices rise for awhile, and then get turned back at the 26,600 line or somewhere south of there, then all eyes go to the other line at 23,800.  If that one gets crossed, most will take that as a sign that the correction is beginning, and some pretty rapid selling could ensue.
 
Does this matter to you?  It probably matters, but it may not be the set of measurements you should be paying attention to most.  After all, are you more concerned with what happens in the market, or your own portfolio?
 
Portfolios need to be rebalanced periodically to keep them from becoming over-concentrated (and therefore, over-exposed to a given risk).  Any time a portfolio component goes up a lot or down a lot, it creates an imbalance.  The creation of such an imbalance is usually a good time to rebalance.
 
So rather than asking whether or not the market is at a top, perhaps it would be more applicable to ask how long it’s been since your last rebalance?  And even more than that, what’s happened to your balances in the meantime?
 
Whether you think the market is going higher or not may be a secondary concern if your portfolio is already out of balance in the current moment.
 
If you are retired, this is an even more critical question.  There are very few circumstances that I can think of in which it would be “best practice” for a retired person to have more than 25% of their holdings in stocks and stock funds.  And basically none that I can think of in which they should have 50% or more.
 
So if you are retired, where’s your percentage right now? 
 
If you’ve had any stock exposure at all the last two years then it is likely that part of your portfolio has grown more than the other parts.  Which is nice, since it means you have more money.  But it also probably means you are out of balance.  Maybe way out of balance.
 
Point being, instead of worrying about where the market is, maybe it would be more productive to look at where your portfolio is.  Your next action step is far more likely to come from that investigation than it is from trying to read the market’s tea leaves.
 
If rebalancing your portfolio is what you ought to do right now, whether the market goes higher or lower, then that would seem to make it the far important thing to focus on.