Page 342 - How to Make Money in Stocks Trilogy

218 A WINNING SYSTEM

leaders will succumb to the selling. This is exactly what happened in the 2000
bear market. Cisco and other high-tech leaders all eventually collapsed in
spite of the many analysts who incorrectly said that they should be bought.
That’s also what happened at the top of the Nasdaq in June and July of
2008. The steels, fertilizers, and oils that had led the 2003–2007 bull market
all rolled over and finally broke down after they appeared to be bucking the
overall market top that actually began with at least five distribution days in
October of 2007. U.S. Steel tanked even though its next two quarterly earn-
ings reports were up over 100%. Potash topped when its current quarter
was up 181% and its next quarter was up 220%. This fooled most analysts,
who were focused on the big earnings that had been reported or were
expected. They had not studied all past historical tops and didn’t realize that
many past leaders had topped when earnings were up 100%. Why did these
stocks finally cave in? They were in a bear market that had begun eight
months earlier, in late 2007.
Market tops, whether intermediate (8% to 12% declines) or primary bull
market peaks, sometimes occur five, six, or seven months after the last
major buy point in leading stocks and in the averages. Thus, top reversals
(when the market closes at the bottom of its trading range after making a
new high that day) are usually late signals—the last straw before a cave-in.
In most cases, distribution, or selling, has been going on for days or even
weeks in individual market leaders. Use of individual stock selling rules,
which we’ll discuss in Chapters 10 and 11, should already have led you to
sell one or two of your holdings on the way up, just before the market peak.

Other Bear Market Warnings

If the original market leaders begin to falter, and lower-priced, lower-qual-
ity, more-speculative stocks begin to move up, watch out! When the old
dogs begin to bark, the market is on its last feeble leg. Laggards can’t lead
the market higher. Among the telltale signs are the poor-quality stocks that
start to dominate the most-active list on market “up” days. This is simply a
matter of weak leadership trying to command the market. If the best ones
can’t lead, the worst certainly aren’t going to do so for very long.
Many top reversals have occurred between the third and the ninth day of
a rally after the averages moved into new high ground off short chart bases
(meaning that the time span from the start to the end of the pattern was
really too short). It’s important to note that the conditions under which the
tops occurred were all about the same.
At other times, a topping market will recover for a couple of months and
get back nearly to its old high or even above it before breaking down in