Four Signs the Market Has Hit an Extreme

There’s an old saying that history doesn’t repeat itself, but it often rhymes. Many market practitioners use historical analogues as part of their analytical toolkit, operating under the theory that similar patterns will tend to generate similar outcomes. One of the holy grails of market analysis is to be able to identify significant tops and bottoms with a reasonable degree of certainty. So, to that end, the first step would be to figure out exactly what characteristics are shared by past market extremes. Can we identify a set of factors that have characterized historical tops and bottoms? I decided to take a look. I’m a macro strategist who writes Bloomberg’s Macro Man column, and in these pages I’ve been examining some market maxims to see if the data support them—or not.

How exactly should we define a market top or bottom? In analyzing past behavior, I identified tops and bottoms as a prominence that represented an extreme price for the six months before and after the observation. So in looking at the Euro Stoxx 50 Index from 2014 through 2016, for example, we can see bottoms in October 2014 and February 2016, with a top in April 2015. The low established in June 2016 after the U.K. Brexit vote wasn’t a bottom because it came within six months of a lower price extreme.