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How to spot a bull market top

Jim Slater on predicting bull markets

Veteran UK investor Jim Slater is known for his penchant for high-flying growth shares. But that doesn’t mean he’s always optimistic.

Slater has lived through many market cycles in his five decades of investing, and like any great investor he knows that shares go down as well as up.

Back in 2008 I found his signs of a bear market bottom a useful waypoint in navigating the slump.

But Slater has also shared some tips on how to spot a bull market top.

Predicting the next move in the stock market is notoriously difficult, if not impossible. (Remember the Vanguard study that showed that pretty much all methods of forecasting market returns were useless?)

And calling an end to a bull market is even more dangerous than doing the same for bear markets.

With a few notable exceptions1, stock markets have always bounced back from big corrections.

You might have to wait for a few years for your guess that a bear market will come to an end to prove right – perhaps long enough for you to have really got the call wrong – but all bear markets ended eventually.

The opposite is not true of bull markets.

Despite what some cynics seem to think, markets are cyclical over the short run, but in the long run they tend to rise higher. The UK and US markets stand far, far above their levels of 30 to 100 years ago.

If you predict a market is due to pause or fall – which is what calling the top of a bull market amounts to – then you are betting against this trend.

So timing is all-important.

Signs of a bull market top

Most of us will do better not to try, but for those who want to have a stab at stock market prognostication, here are Jim Slater’s signs of the top of a bull market.

(Note: My comments are in italics).

Cash is trash

The ‘rubbishing’ of cash and the consequent low institutional holdings are an obvious danger, signalling that most funds will be fully invested. Does this hold after a period of 300-year lows for interest rates? I’d bet not, but Japan’s experience says otherwise.

Value is hard to find

The average P/E ratio of the market as a whole will be near to historically high levels. The average dividend yield will be low and shares will be standing at a high premium to book value. Some people would prefer to look at the cyclically-adjusted P/E ratio here, though I’d be cautious.

Interest rates

Interest rates are usually about to rise or have started to do so. In mid-1995, interest rates in both the USA and UK had been rising from historically low levels. Investors were wondering how much further they would rise before topping out. (Since Slater wrote these words, we’ve seen what historically low interest rates really look like…)

Money supply

Broad money supply tends to be contracting at the turn of bull markets.

Investment advisers

The consensus view of investment advisers will be bullish.

Reaction to news

An early sign of a bull market topping out is the failure of shares to respond to good news. The directors of a company might report excellent results only to see the price of their shares fall. The market is becoming exhausted, good news is already discounted, and there’s very little buying power left.

New issues

Offers for sale, rights issues, and new issues are usually in abundance, with quality beginning to suffer and low-grade issues being chased to ridiculous levels.

Media comment

The press and TV tend to give more prominence to the stock market and to be optimistic near the top. If prices appear high in relation to value, the argument is that ‘it will be different this time’. The few bearish articles that warn of dangers to come are ignored by investors.

Party talk

At the peak of a bull market, shares tend to be the main topic of conversation at cocktail and dinner parties. The financial crisis has made the market a talking point for years, however, so perhaps this indicator is misleading in the current environment?

Changes in market leadership

A major change in leadership is often a prelude to a change in market direction. Near the top of a bull market, investors often move from safe growth stocks into cyclicals, which they buy heavily.


An interest study by Matheson Securities of ten stock market turning points demonstrated the stock market turned downwards on average about ten months after the unemployment figures began to fall. Remember that unemployment is a lagging indicator.

Want to learn more from Jim Slater? Check out his superb guide for small cap stock pickers, The Zulu Principle.

  1. China and Russia especially, but arguably also Germany and Austria. []

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{ 19 comments… add one }
  • 1 Neverland June 20, 2013, 11:48 am

    Couple of months late mebbe?

  • 2 The Investor June 20, 2013, 11:57 am

    If it’s hard to call the end of a bull run, it’s definitely impossible to get it right to the day except by luck. Also I think any market timer would want to see a few per cent come off to confirm the trend first.

    For what it’s worth, I doubt this bull run ends here, though I’d be completely unshocked to see another 5-10% or so come off. But who knows? 🙂

  • 3 OldPro June 20, 2013, 12:18 pm

    Interesting times for playing this age old game…Ben Bernanke said Stateside yesterday how QE may end and rates rise, but broad money supply tight in much of world one could argue.

    Also I don’t attent cocktail parties these days but in my posh local (dog and duck… charming barmaid) the talk is not of making millions in the market, except for a few of us old timers looking to keep our ill-gotten…!

    Bull market is long in the tooth however. Place your bets.

  • 4 Iver June 20, 2013, 1:32 pm

    Short-term correction of a further 5%-8% as investors panic over the potential tapering of QE. Flat summer. Modest gains in the autumn. Beyond that the market may start to respond more “normally” to macro-economic news.

    In any case, it doesn’t matter to us as we all read this site and therefore buy into the concept that “cowardice will cost you dear” 🙂

  • 5 Paul Claireaux June 20, 2013, 3:14 pm

    Developed markets clearly have scope to fall 50% before this rout is out. Yes, they might recover and get back on their trend of the last 4 years but I wouldn’t put heavy money on it.
    I’m buying on falls from here and reducing exposure on further rises. USA market especially is at an historically stretched valuation level on a CAPE basis.
    As for markets always going up long term – that depends on your starting point and your idea of long term. 24 years after 1989 the Japanese Stock market (As measured by Nikkei 225 index) was c75% down.
    That market was on a very high price to earnings multiple in 1989 – higher than USA and UK in 1999 but it shows how long an adjustment can take when a leading economy hits the wall of debt – and they were the world’s leading economy back then..

  • 6 Thomas June 20, 2013, 3:40 pm

    I don’t even bother trying to figure out when and why. I look at the stocks I have and whether or not I believe in them. If they have made me money then taken some gain of the table and putting it in cash is my choice. Then on the dip I buy more. You never can really tell when your at the end of a cycle. Its all a guessing game.

  • 7 dearieme June 20, 2013, 5:39 pm

    I’m inclined to think I might buy equities when our fixed term Cash ISAs mature, or our Index-linked Gilts. There are worse criteria I suppose.

  • 8 Jon June 20, 2013, 6:12 pm

    I want to buy consumer staples for my HYP but Unilever, Diagio, Reckit, SAB still have P/E of 18+

  • 9 Curious-Sarah June 20, 2013, 11:06 pm

    Mr Neverland why are you always so grumpy? Seems every time I read a new post on the Monevator website I get to the bottom the post to see that you have already written some dissatisfied commentary. There are other websites you know where everyone is more half-glass-empty such as you. I hope you stay around and cheer up and eat more chocolate though. It makes you happy. Scientifically been proven!

    You could swap names with Grumpy Old Paul. He seems by comparison the life and soul of the party.

    To The Investor didn’t you tell us to sell shares a couple of months ago anyway? After a dream of the Witch of Wall Street or something? 🙂 🙂

  • 10 PC June 21, 2013, 8:49 am

    The Newsnight spot on booming stock markets was a bit of a warning sign – 22 May http://www.bbc.co.uk/news/business-22625480

  • 11 ermine June 21, 2013, 9:38 am

    I for one would like to congratulate TI for posting this on the very day the markets had a hissy fit. I didn’t realise you were so well connected with that nice American fellow Mr B. Top class sense of timing, indeed!

  • 12 Grumpy Old Paul June 21, 2013, 10:17 am

    Surprised Slater doesn’t mention retail investor behaviour as a contrary indicator. See http://www.economicvoice.com/willis-owen-sees-strong-retail-investor-activity-at-beginning-of-new-isa-season/50036857#axzz2Wq6lc9aR as the kind of article that should raise alarm bells.

    Never been called the ‘life and soul of the party’ before. More the ‘party pooper’!

    I suspect being contrary in nature and having a certain amount of self-doubt are helpful psychological traits regarding investment. The former leads to not running with the herd and being caught up with the latest bandwagon. The latter predisposes one to towards diversification and, perhaps, to a passive investment style. Unfortunately, it also results in one missing out by not making big bets such as buying bank shares at the bottom of the market or using bear funds (or bear ETFs)!

  • 13 The Investor June 21, 2013, 10:51 am

    @Curious-Sarah — Yes, Neverland does tend to chime in with a contrary position to most of my posts. But it’s not aggressive/nasty like you get on some sites, so can’t complain. I think of him as the Roman slave (no offence meant, it’s a historical analogy!) whispering “Respice te, hominem te memento” into my ear… 😉

    I didn’t specifically say to “sell shares” in the post you’re referring to. (I don’t know if I’d ever write that, although I like to think I’d spot a no-brainer 1999 type scenario nowadays). I did mention that I was liquidating some of my holdings though. The timing was good, but it was driven by prudence as much as any attempt at market prognostication.

    @Iver — Acting at all costs most people dear, as you know. I do play around with my allocations actively. More fool me? Time will tell!

    @Paul Claireaux — Careful! You seem to be covering all your bases there like a good market pundit, which is good for reputation risk but rather at odds with your repeated claims here that market valuation is very practical. You will sell if the market goes up, but buy if it falls. So it’s perfectly priced here? 🙂 Yet the market could fall 50% and is overvalued on a CAPE basis? If I was so confident of CAPE as a near-term forecaster — as you may recall I am certainly not — then I’d be massively reducing my holdings.

    All meant in an intellectually challenging spirit, not as a dig. 🙂 I don’t actually disagree markets could fall 50%, but that’s because I think they nearly always could so no great change from my POV. 😉

    @Thomas — Agree. Careful you don’t cut your winners and keep your losers though, if buying individual stocks.

    @Dearieme — Depends on your overall allocations I guess. Stocks and cash are wildly different investments, as I know you know. Will be a long time still before Cash ISA rates rise I’d guess. (At least a couple of years?)

    @Jon — Annoying isn’t it? That said Diageo has been dropping a bit of late, at last.

    @PC — Good spot. Still, I’d say bad news reports still massively outweigh the good ones. Look at how the banks are still routinely discussed, for instance. I thought Lloyds share price rise on the PRA report on capital was telling, and at odds with the news agenda. (I am long LLOY so may be biased, especially as long from c.30p! 🙂 )

    @Grumpy ‘Party Boy’ Paul — Hmm, I guess that’s in his cocktail metric. I also suspect that data on retail investor flows are much more readily available in 2013 than when Slater was writing (mid-1990s). I agree it’s useful, but I think part of the charm of his tips are they are ‘fuzzy’ and qualitative. We live in a quantitative world, so arguably (very arguably) qualitative factors might just give some of us who try to beat the market (for our sins) an edge?

    @OldPro — Are you saying “it’s different this time”? Careful! That said I’d be amazed if it wasn’t at least a bit different, given the hugely distorting impact of Central Bank intervention. Whether it’s benign good or as uber-bears fear simply delaying an inevitable mega-correction we’ll have to see. A middle course as ever is likeliest I think.

  • 14 The Investor June 21, 2013, 10:54 am

    @Ermine — Hah! 🙂 But is reflexivity at work? Perhaps some hedge fund uses Monevator bullishness as a buy/sell signal and I was a butterfly flapping its wings at the edge of the market. 😉

  • 15 Jon June 21, 2013, 11:24 am

    I’ve also been tracking the US consumer staple behemoths like Coke, Pepsi, McDonalds, Proctor & Gamble – would love a slice of those for my HYP for diversity (currency, geography etc). Disadvantage is 15% tax on divi’s.

  • 16 Alex Khandelwal June 26, 2013, 12:22 am

    What are your thoughts on the argument that market timing is a loser’s game in the long run. True, some managers can beat the market by sheer luck for a number of years, but I wouldn’t call this a sound investment strategy.

    I’m skeptical of anyone who claims to have a forumla to time the market. This means spotting bull market tops, bear market bottoms and everything in between.

    I recently posted a blog last week on this same issue. The title is, “Does Anyone Have A Crystal Ball?” My general opinion is that nobody can predict market directions for any useful amount of time.


  • 17 PC June 28, 2013, 8:44 am

    Article claiming switching in and out of the market is the way to go – I wish I had the mathematical skill to offer some counter argument .. http://www.priceactionlab.com/Blog/2013/06/the-passive-indexing-buy-and-hold-crowd-should-reconsider/

  • 18 The Investor July 2, 2013, 11:52 am

    Personally I tend towards the view that market timing is not possible in practical terms as an everyday investment strategy. I do think however that at the extremes we might all boost our returns a little by investing less when the market looks very expensive and more when it looks very cheap. Exactly *why* it looks that way is not something I believe can be boiled down to a simple CAPE/PE10 model or similar, however. It’ll be an art, not a science. And away from the extremes I doubt it’s worth the candle.

  • 19 MyNamesEccles November 22, 2015, 8:30 am

    “And away from the extremes it’s not worth the candle”. Couldn’t agree with you more.
    I am a firm believer in the near universally unpopular notion that some people can productively time the markets. They actually can, but only as a whole and only at the extremes so therefore infrequently. Exact timing is, of course, totally impossible and any strategy must acknowledge that.
    The “timing the market” debate is too frequently framed as getting the absolute tops and bottoms right. Of course that is bunkum. ’nuff said!
    However, this should not be confused with assessing the state of the market as being somewhat extreme and placing a riskier bet that nevertheless allows you the luxury of time to cover the uncertainty of when the market will actually turn. Not being greedy for the last cent is essential. Extreme patience is a necessity and most people would not be prepared to be inactive for very long periods both before and after taking a position. If you must try this, it should not be your only or main investment strategy by any means.
    There is. of course, one incey wincey detail missing from the above scenario. How do you know when it is getting extreme? No amount of market data trawling will really help. Here again, I agree with TI, it’s largely intuitive and a bit of an art. Most people can’t do it by definition, otherwise there would be much less market fluctuation.
    A recent book review in the Economist talked about a small number of people who are better than average at forecasting. It described their personality characteristics and I matched the description very closely. Humble I am not!
    The following is not telling fibs on the internet protected by anonymity. I really did benefit hugely from the dotcom bubble and the Global Financial Crisis. I desperately needed to. I have no such skill with individual shares but couldn’t resist the Apple mania some time ago.
    I was driven to take extreme action by a near full house of calamitous happenings ( loss of career, addicted child, a tumour, diabetes and the Asian Financial Crisis….beat that anyone?) in the late 90s. Having solved my financial difficulties (was it really just luck?), I now have no incentive to take big risks again.
    If there were qualities that helped me, I would describe them as:
    1. Having a real interest in global economics, business and finance.
    2. Being relatively immune to the financial media and the madness of crowds. Researchers say the scepticism of investors with a depressive personality helps. (Of course, I am actually a very very normal and extremely well- balanced person!)
    3. Having great patience and being resigned to possibly overplaying the waiting game.
    4. Oh yes, I nearly forgot, willing to take biggish but hopefully well thought out risks.
    One last major point. Don’t try this at home! If you are the right type, you will be doing it already.

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