Is This A Blow-Off Top? Four Ways To Tell

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Those who lived through the last two speculative blow-off tops know the impossibility of predicting the final top.

How can we tell if stocks are in the final blow-off stage of a bubble? There are four basic give-aways:

1. Parabolic rises in stocks and speculative debt.

2. The mainstream financial media claims the clearly visible bubbles are justified by fundamentals.

3. Conventional financial authorities insist this is not a blow-off top.

4. The expressions of regret of those who sat out the latest rally become ubiquitous.

In the past few days, I have read two laughably baseless justifications of the bubble in Chinese stocks by conventional financial analysts:

A) China is a "black box," i.e. unfathomable, so go with what we know, which is that China is a nation of entrepreneurs: this is the green light to buy the bubble here if you want to reap easy profits.

B) The stock market bubble in China is positive evidence of a healthy re-adjustment of China's financial system.

That neither thesis has the slightest foundation in reality doesn't matter, as the real agenda of the analysts is to justify their own attempts to join the crowd reaping vast profits in the bubble.

This denial that a speculative blow-off is clearly occurring is a key indicator that a blow-off top is in its final stages.

Consider the Shanghai stock index (SSEC). Is it truly normal for the stock markets of nations with economies approaching stall-speed to double in less than a year?

Amazon is a large, well-run corporation, but its core businesses are low-margin (as for the cloud business--everybody and their brother is ramping up their cloud biz). Is it truly normal for a low-margin company's stock to rise 50+% in four months?

Margin debt reflects the "animal spirits" of speculation and confidence. When borrowed money is used to buy more stocks, it makes the resulting rise vulnerable to a decline that forces recent buyers to liquidate their positions to cover their margin calls.

Margin debt has reached new highs; what happened when margin debt hit these levels in prior cycles?

The soaring confidence in future advances that define blow-off tops is visible in declining measures of volatility such as the VIX and VXX. (Recall that volatility and stocks are on a see-saw; should the VXX reverse and move higher, stocks would plummet.)

One last method to identify blow-off tops is to look for repeating patterns that marked previous blow-off tops.

Those who lived through the last two speculative blow-off tops know the impossibility of predicting the final top. Those who bet the top is in (i.e. make short bets that will gain if the market reverses and drops) are often forced to cover when the market advances further, and this panic buying pushes the market even higher.

Only when the ranks of bears willing to bet against the market thin will the short-covering boost dissipate. At that point of bearish exhaustion, the market will roll over when the greater fools (last buyers of the blow-off top) run out of margin buying power.

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LawsofPhysics's picture

LOL!  Technical analysis in the absence of price discovery, good luck with that.

FMOTL's picture

you dirty bull market DENIER !

Headbanger's picture

FWIW:  Another recent call for a blow off top soon:

https://www.youtube.com/watch?v=UZN6aAcrFfA

PartysOver's picture

So everybody and their cousins are expecting a market crash.  They will be getting short.  Hmmm... getting short in a market that is obviously rigged to go up via CB's and Algo's.  Can you say "Massive Short Squeeze"?  Someday it will end and end very badly.  But I don't think we are there.

Headbanger's picture

Yeah but then everybody is expecting a short squeeze so it can't happen now either.

So the market crashes any day now.

But who knows?

ONE THING WE CAN BE SURE OF IS WHEN THE """MARKET"" DOES START FALLING

IT'S GONNA KEEP FALLING FOR A LONG TIME!

pods's picture

Chinese knitting women traders-------check!

Banana stand trader--------------------check!

4 trucks that make grilled cheeses for $100 million valuation------check.

Anything else needed?

pods

max2205's picture

Gee Charles you forgot that the Fed will buy every dip for the next 5 years.

 

Again!

TruthInSunshine's picture

Charles Hugh-Smith, of Two Minds = really just a paranoid schizophrenic with multiple personality disorder who goes into closet to change his mind.

SilverDOG's picture

Yep, do not tell him... yet.

 

 

Isn't that a CNBC tactic ?

 

 

rccalhoun's picture

all governments and central banks are all in --- there is no exit strategy, no plan B....just play this tune until war comes

eatthebanksters's picture

There are are only three things that will end this manipulated Bull market:  1. The Fe decides things are heating up and decides to pull back an slow it down, 2.  Te economy gets worse and the Fed prints too much and we get runaway inflation, 3. This shit keeps going like Japan for 50 more years or until the peasants rise up....I think the last one is probably what's foing to happen, but its years away.

Ham-bone's picture

Seems pretty well said...except global credit/debt growth is slowing and only one soon only two sources...government debt and corporate bond sales at ever NIRP'ier rates...it's not a mindset or investors that matter any longer.  The digital HFT markets are now so clearly managed that any "market event" would likewise be a managed affair.

asset reovery vs. no economic recovery...

http://econimica.blogspot.com/2015/04/stocks-or-economydoes-either-represent.html

and global credit / debt growth slowing and governments substituting debt for missing investments...China is the last great bubble and the last (ironically) to switch from "private sector" to government debt creation (yeah, I get it that it's not exactly "private" markets as Chinese banks are made to lend).

http://econimica.blogspot.com/2015/03/are-seeds-of-depression-sprouting.html

lastly why population growth nor immigration will save the US or other advanced economies

http://econimica.blogspot.com/2015/02/fundamentally-flawed-chapter-4.html

Pool Shark's picture

 

 

pods:

 

A stock trading at $389 (AMZN) reports a loss of 23 cents/share and promptly rallies 16%-------check!

 

LawsofPhysics's picture

Exactly.  No price discovery, period. This is not a top, it just is.  Might be a plateau if anything.

pods's picture

I'd accept this was a top in the normal sense if one question could be answered.

If they pull the FRNs out of the stock market, where the hell will they put them all?

pods

Pool Shark's picture

 

 

Well, this morning it looks like the FRN's are flowing into Gold & Silver...

 

Model T's picture
Model T (not verified) pods Apr 27, 2015 2:47 PM

Traditionally, they go into the US Treasury Bonds, which is many times larger than the Stawk Market; where the money has been going now for months; as many managed selling days have occured as the properly educated are exiting the full blown bubble that is the stock market. A small side stream flows into the Metals. These prices on the NYSE will only be fond memories by Thanksgiving.

El Vaquero's picture

The people in the know take profits and put it into their portfolios, a small number of lucky people outside do the same and for everybody else, *POOF* it's gone!

 

Alternatively, it could simply be *POOF* it's gone. 

 

Paper games are fun!

Excursionist's picture

I can't say one way or another whether we're in a top, but at the end of the day there seems to be just too much disbelief and negativity in the market for this to be a manic blow off.

I was only a young lad in '87, so I cannot speak firsthand about the sentiment and commentary back then.

But in '00 / '01 and again in '07 / H1 '08 I did not encounter such widespread disbelief and pessimism among the (alleged) smart money. 

If we are in a blow off, then it would be unlike the prior two.

Debt-Is-Not-Money's picture

"Might be a plateau if anything."

A permanent high plateau?

Are you Irving Fisher re-incarnated?

LawsofPhysics's picture

it took a very long time, several generations in fact, for the Soviet Union to collapse.  "Officially" everything was awesome for a long time there as well.

 

Again, does price discovery matter or not? simple question, one would think.

walküre's picture

There's always price discovery. When you go to the store and see how prices have gone up, you just made a price discovery!

Question then is, are you still buying it or buying the same amount of it?

Price manipulation never works long term. You, me and everyone else are the blood & flesh market participants who make the choice to either participate or not.

Model T's picture
Model T (not verified) walküre Apr 27, 2015 2:49 PM

Of course; there is always price discovery; you'll have to pardon the wanna-be wise; who didn't bother to study anything before promoting themselves.

LawsofPhysics's picture

I guess it's safe to put you in the "debt does not matter" camp.

 

Hey, everything is awesome, for my tribe and I.  Now about that 99%...

LawsofPhysics's picture

Sure, but the markets most people are participating in are not being monitored.  Exactly my point.

Model T's picture
Model T (not verified) LawsofPhysics Apr 27, 2015 2:48 PM

No; it is not a plateau; whicih of course, is impossible.

Creepy A. Cracker's picture

It's not a top.  It's more of a whirlpool swirling in a toilet.

tenpanhandle's picture

With a big floating turd that wont go down.

Haus-Targaryen's picture

How long can a market last without real price discovery? 

I am really looking foward to the next liquidity squeeze.  

Steal Your Face's picture

I ordered a case for my iPhone and a Buddy Christ statue. Maybe that explains it.

Well, I don't care if it rains or freezes,
Long as I have my plastic Jesus
Riding on the dashboard of my car

Through all trials and tribulations,
We will travel every nation,
With my plastic Jesus I'll go far.

DavidC's picture

Nice one pods!

DavidC

KnuckleDragger-X's picture

Everything indicator in the world economy has been suppressed and/or manipulated, so I expect the black swan will be very obvious but completely invisible until it lands and then everyone will be running in circle about how big a 'surprise' it is.....

Haus-Targaryen's picture

The eventual end will not be some failed GREXIT negotiations, nor will it come from a PBOC Press Confrence.  The catalyist for the end will occur, for most, seemingly randomly some Friday evening ECT.  Everything will be just fine, and then people will start complaining that Amazon and PayPal aren't working.  

Thereafter, online banking features such as wire transfers and extra-bank transfers will get turned off, and then thereafter panic will set in with the large money.  

I think it'll start off like Cyprus, and end like Ukraine.  

God help us all.  

KnuckleDragger-X's picture

Yep and one of the reasons I have a stash of paper money. Because one of the first things will be everybody's plastic will quit working and cash will buy you useful things just before it all implodes....

JohninMK's picture

You'd just make sure you go 'shopping' with a couple of buddies for protection.

CH1's picture

It all depends on how much currency the Fed throws into the market.

Fundamentals? Those lost validity a long way back.

LawsofPhysics's picture

Bingo, yes, just like the banks, fundmentals are now useless.

Salah's picture

All based on some geo-political-military black swan...same as what ended the last one.  Putin suddenly invaded Georgia in mid-August 2008 when an "orderly" liquidation of asset-back "securities" was underway....panic ensued and there was a giant bolt to the exit doors.  It'll be the same thing again. 

woolly mammoth's picture

It's not stocks that are in a bubble, it's the Dollar. The value of Stocks will go where the Dollar goes.

auntiesocial's picture

any charts showing what would / could have happened if there was no QE... at all... or too speculative?

dcohen's picture

That title was bound to be sexually abused

tenpanhandle's picture

Your avitar caused me to completely forget what the parent article was all about.  Thankyou.

Oh regional Indian's picture

Take a step back from there even LOP, how about Price discovery in a totoally manufactured reality.

My neighbour is a TA guy, makes 30-40% a year, like clockwork. Says that TA "knows"....hmmmm

 

Anyways, this is how I blow off a top...

https://www.youtube.com/watch?v=DcuIThFpV6E

LawsofPhysics's picture

Well, personally, my reality is great.  Some interesting harmonics there.   Electromagnetic radiation (which is everywhere and everthing) and sound have one thing in common, they both behave as waves and can be easily described using math.

Oh regional Indian's picture

I "hear" you...and I play for those harmonics...

SolarSystem1932's picture

ORI,

What was the bowed instrument?

And now that I'm tired of the fiddle and cello, what stringed fretless instrument should I try next?

Seriously.

Oh regional Indian's picture

Hey Solar, the bow was the one locals use, it's made brom bamboo twine and bamboo with a little local gum rubbed on. And the rest is a regular Fender :-)

And may I suggest guitar, fiddlers make great flat-pickers, Bluegrass players, if that is your thing. Fretted though.

There is a beautiful Indian Fretless instrument called the Sarod, check it out.

 

http://www.sarod.com/

Good stuff. Good to know that there are quite a few musicians here on the hedge.

 

We should do a global collaboration and release it and send the money to Nepal.

Who is game? I'll mix it here...

I'm in! 

Joe Sichs Pach's picture

Very nice ORI. What were you processing that signal through?
I too,like to bow an acoustic guitar on occasion. Sonically haunting.

Solar, how about a Tanpura? Drone instruments FTW

Oh regional Indian's picture

Thanks Joe.

That sound is a long delay, a little phaser, a little reverb in studio and the amazing acoustics of this 20 foot high stone dome I recorded in. :-)

Rapelomacy's picture

Ori, have you ever bowed a Santur? It is one of the most eerie and beautiful tonal sounds I have ever heard, especially at the lower register and after processing. You should be so lucky to have such high ceilings. People do not understand that sound is a vertical anomally, not horizontal, and with limited vertical space nodes begin to form (parallel surfaces lead to room nodes), whereas vertical space allows reinforcement. Anyway, I'm in!