Investment funds that have done well experience modest withdrawals. I recall during the tech boom from 1996 to 2000 when lots of money rolled out of equities and into real estate. This wasn't a market call as much as it was a lifestyle upgrade for those who had lived through the terrible 1970s markets and invested in the early 1980s boom.
If you want a quantitative way to look at the way markets top, use the 10-month moving average for equities to track how much enthusiasm there is for the asset class. Different stocks have a different level of sensitivity to market weakness, with the large capitalization indexes being the last to fall.
Bottoms, on the other hand, are an event. The investor psychology of losses leads to concern then to fear then to panic, as gains appear to evaporate. Unlike the indifference of tops, fear leads to rapid action -- selling. We saw this in the 2008-09 collapse.
My suspicions are that this is neither a top nor a bottom but instead is a period of digesting the gains of the past year or so. As we noted before, most of the current bull market has been a surprisingly slow, steady grind. Indeed, there have been remarkably few days when the market moved more than 1 percent in either direction. In a streak that ended Jan. 26th, the S&P 500 gained a hefty 14 percent during a 4 ½ month period without experiencing a single 1 percent up day. This has never happened before.
That rapid gains could be simply a case of too fast, too far. If you are looking for a comforting narrative explanation as to why markets are correcting, that is as good a guess as any. Prices simply got way ahead of themselves on investor enthusiasm for tax cuts, strong corporate earnings and global economic growth. Or if you prefer, it is a merely the drunken random walk of Mr. Market.
Either way, the bull market seems to be intact, though volatility has returned, along with markets that can move in both directions. The past few months have been aberrational; what is occurring now seems to be a possible reversion to more normal market behavior.
This column was provided by Bloomberg News.