IBD® Meetup Investor Education Series Lesson 1: How to Spot Market Tops When a market tops and begins to decline, it typically takes 3 of 4 stocks down with it. That’s why it’s critical you learn to spot market tops. Together with your local IBD Meetup group discussions, here are 3 key ways to spot a market top. You’ll learn how to proactively protect your money when the market direction begins to change. Spot Market Tops by Counting Distribution Days Look for a growing number of distribution days in a major index: the S&P 500, Nasdaq Composite, Dow Industrials, or NYSE Composite. Distribution is just another word for selling, and a distribution day is when one or more major market index closes down more than 0.2% on increased volume from the prior day. Learn More About Market Tops Articles 4 Use The Big Picture, Tools To Gauge Market 4 Learn To Recognize Distribution In Chart 4 Think Defense When Market Turns Sour Stalling action, or “heavy volume without further price progress up,” is also counted as distribution. That’s when volume on an index is higher than the day before, but the price increase is significantly smaller than the prior day’s much larger increase. Videos When distribution days start to grow, it means the big institutional investors, like mutual funds, banks and insurance companies, are selling more shares. 4 Know When To Get Into - If you get 5 or 6 distribution days over any 5-week span, the general market almost always turns down. 4 Reduce Your Holdings In A Down Market And Out Of - The Market Free Online Courses 4 Spotting A Market Top 4 Market Direction 3 You can see the current number of distribution days in the Market Pulse graphic in The Big Picture on page A1 in IBD each day. Free Downoads 4 How You Can Recognize Market Tops and Market Bottoms Nasdaq Top in 2007 See how counting distribution days helped investors lock in gains and minimize losses in the 2007 - 2008 financial crisis. Watch Video Exclusive Interview with William J. O’Neil When to Get Into - and Out of - the Market Hear IBD’s founder discuss the rules of successful market timing in this excerpted interview from 2008. Listen Now Get the How to Make Money in Stocks Complete Investing System by IBD founder William J. O’Neil. Includes everything you need to get started. Learn more Continued on next page... 2010 © Investor’s Business Daily, IBD, CAN SLIM and corresponding logos are registered trademarks owned by Investor’s Business Daily, Inc. 1/2 IBD® Meetup Investor Education Series Lesson 1: How to Spot Market Tops Other Indicators of a Market Top a Watch for Weak, Abnormal Action in Leading Stocks A sign the market may be topping is when leading stocks start showing weakness. By “leading stocks” we mean companies outperforming all other stocks in terms of earnings and sales growth, profit margins, return on equity, relative price strength and other key measures. These leaders serve as a bellwether for the overall market. When they start to show clear weakness, the overall market is not far behind. Signs of abnormal behavior in leading stocks can include… » Late-stage bases: If most leading stocks have had big runs in the bull cycle, and they’re now breaking out of 3rd or 4th stage bases, the broad market could be running out of steam and ready to correct. (Learn more about late stage bases). » Climax tops: A climax top is essentially when a leading stock makes a huge, final surge over 7 to 10 days after advancing for many months. It’s a sign the party may be ending. (Learn more about how to spot climax tops). How 2007 Breakdown Of Leaders Warned Investors See how even the leading stocks faltered, then sold off hard when the market topped in late 2007. Watch Video a Beware If Low-Quality Stocks Start Leading When stocks that led the current uptrend falter and lower-priced, lowerquality, speculative stocks start to lead, watch out! If the best stocks can’t lead the market higher, the worst ones certainly aren’t going to do so for very long. How to Protect Yourself When the Market Tops 4 Cut ALL losses short Regardless of market conditions, always sell if a stock drops 7% - 8% below your purchase price. Sell even sooner if distribution days are mounting and your stocks are showing weakness. 4 Get off margin Play it safe and don’t compound any losses by staying on margin. 4 Lock in your gains During the early phase of a bear market, certain leading stocks may seem to hold up. But don’t be fooled! Most will eventually fall with the rest of the market. Be sure to proactively lock in some or all of your gains. At Your Next IBD Meetup Be sure to attend your group’s next meeting to get: 3 If “Leaders down in volume” start to regularly outnumber “Leaders up in volume” in the Market Pulse, it may mean the market is topping. »More info on market tops »Insight into the current market & how to handle it »Stock ideas to help you build your watch list ....and much more! www.investors.com/meetup 2/2 2010 © Investor’s Business Daily, IBD, CAN SLIM and corresponding logos are registered trademarks owned by Investor’s Business Daily, Inc.
