Markets Top & Bottom When ?

Being involved in the grain futures market as a hedger this past summer was a trip to hell and back. Margin call city. My post may be more focused on the 'leveraged issues' like futures etc

One thing I've noticed (and Dennis Gartman talks about this phenom quite regularly) is that when the margin calls get absolutely nightmarish you're usually marking a top or bottom.

The underlying cause of a "climax top/bottom" seems to be totally related to the margin calls flushing people out.
So I've come to sorta believe that markets top NOT because there is nobody willing to still buy it (because obviously the trend followers that are long should still be able to pyramid their gains), but because NOBODY HAS THE GUTS LEFT TO SELL IT (or more importantly the $$$$ available for MARGIN CALLS to sell it).

The converse is probably true of a climax bottom.....everybody gets tired of buying and getting their heads handed to them.
So volume dries up quickly as BUYERS step aside.

The reason I bring these things up is because a lot of people seem to subscribe to the thought that markets always bottom due to a 'surge of demand' or 'value buyers'...when in fact it takes TWO to make a trade...BUYER and Seller. If the buyer is too bloodied to show back up or his BANKER says "no more!" It shrinks the number of people willing to take the other side.

Now a bottom that is formed over a great deal of time, probably is due to true demand and not due to climax sellling. TWO DIFFERENT TYPES OF MARKET BOTTOMS ENTIRELY.

I never thought the 'speed' of the move would ever matter...but now I'm beginning to think that it does in relation to leveraged investments. I think the strong momentum truly 'scares' the financiers away from the trade quicker than if the same move came via a slower trend. As soon as the bank says "no more' the leveraged player has to exit quickly and more importantly...won't be returning for awhile to the game...thus helping to form a top or bottom because trading dries up.

Yes I'm rambling to most of you, and I know you P&V guys have all this figured out already...but I have some people think I'm nuts when I tell them a market will bottom when it runs out of "buyers".....they seem to think that money never runs out and that there should always be somebody with enough money yet to buy it. There probably is enough money yet to buy at value "levels" but are the "guts" still there ?

It's kind of a "margin call/ volume/ rate of change" alchemy.

Do you agree that markets can bottom because of scared buyers?
Do you agree that markets can top because of scared sellers ?

I need a drink.
GM

 

Everything has an intrinsic value. When stocks dip below its instinsic buyers step in. Microsoft would be a steal at 1$ and if it ever did trade that low due to an error you can guarantee that in a nanosecond it would recover becuase microsoft is worth much more than $1 a share.

 

I guess what I'm going to outline is how I think the volume dries up on fast momentum moves and more importantly why it does.
Humor for me a bit here... lets say you and bunch of others think "intrinsic' value on msft is 18.00. The market keeps going lower and everybody buys a bunch there. More negative news comes out and price hits 15.00. Price hits 10.00 and everybody buys on margin and finally tap out. Market keeps grinding lower. The guys that thought they had a good value between 10 and 18.00 are starting to sh*t bricks. FEAR starts to set in on them.
The guys that still have money look at the demise and decide to get to get greedy and hold off "a little more" before they jump into the fray. Thus no buyers around much to believe in the thing.
Takes two to make the market ya know, BUYER AND SELLER. So volume gets really thin as thing is bottoming because the early buyer is busy getting his a@@ chewed by his wife.... and the guy that would buy it is wanting to buy it even cheaper so he's holding off. (he's also scared because the chart looks like crap).

Now like I said earlier, I've noticed this more in instruments that trade with substantial leverage, like the futures I deal with. Usually instead of the wife, it's a banker who gets sick of the margin calls and tells the trader to get out or the broker is getting the trader out because the margin is gone. When that participant is gone....volume is gone....and it's not coming back for awhile. Market tops/or bottoms because if enough of one side gets hurt bad enough, quick enough they take their ball and go home.

Never have done a lot of volume analysis before, but I think this is the reason that volume dries up on climax tops/bottoms...margin calls creating enough fear to scare the one side off.

So like I say earlier, a a climax selling event can bottom when the buyers back away due to fear & margin calls, and in a climax selling event the market can bottom because the sellers are too darned scared to try it anymore.

I believe the general investing public thinks just the opposite, that the lower something goes, that everybody will just show up to buy it. I don't think I totally believe that.

GM

 

you bring up a good point except i tend to put a timeline to work in this situation the margin calls cause the drop off like you mentioned meanwhile the value investors/buyers/whatever you want to call them need time to get used to the volatility OR are scared shitless of it and won't step in unitil the volatility dies down.

 

if you applied your theory to the housing market,no ones buying and they arent foreclosing so is it the bottom,your theory should work in any market that has goods exchanged for some value marker,and homeowners /sellers aren't willing to lower there prices so sellers dry up too

 

IMO bottoms/tops are formed by the expectation that markets will exhibit wave-like movement, which leads to exhaustion of buying/selling pressure.

Say the price is going down; as it goes down further, fewer players are willing to sell as the market becomes "oversold," and therefore the R:R becomes steadily less favorable on the short side. Sellers move to the sidelines while buying pressure remains steady, potential buyers see this and pile in, and you've got your self-fulfilling prophecy.

I don't know how an exhaustion of buying pressure during a downswing would result in a rally. Ultimately falling prices means there's more supply than demand; buyer exhaustion means reduced demand, when you need just the opposite (reduced supply and/or increased demand) in order to see a bounce.

 

There are two components to volume: bid and offer.

If buyers are moving to the sidelines due to margin calls or whatever, sustained selling would cause prices to crash, not move upward. In order to have a bottom it's the sellers who must move to the sidelines.

 

I made a mis-quote earlier I meant to say "So like I say earlier, a a climax selling event can bottom when the buyers back away due to fear & margin calls, and in a climax buying event the market can top because the sellers are too darned scared to try it anymore.

Anyway that's what I noticed this summer in the grains. As the market was exploding higher and firms (shorts) we're getting slammed, once they couldn't short anymore....the top was in.

The trend followers we're still there ready to buy but their partner, the short trader, had to say to hell with it.

GM

 

At some point, given some sort of intrinic value to an asset, it will be "sold out"; those folks that are left holding it are not going to sell. It's at that point that the bottom is in and a sustainable rise can commence.
Usually, trading is pretty quiet in the asset in question. Hence the saying "Never short a dull market". See gold in 1998-2000, for instance (ex the trading on the news of the Washington Agreement in the fall of '99).