Many investors, when searching for signs that a bull market is peaking, tend to reverse the characteristics of bear market bottoms and apply them to the top. Historical price action suggests this approach can lead to misjudgments. A bear market bottom often occurs after trader sentiment collapses and selling becomes concentrated, causing the market to lose momentum sharply in a short period. By contrast, when a bull market reaches its end, the tape often lacks such dramatic intensity. Momentum tends to fade gradually, and indices oscillate near elevated levels.
Looking at several major turning points in the past, the S&P 500 index usually fell sharply in the 50 trading days before a bear market bottom. In the same window before a bull market top, however, the index generally moved closer to sideways. Sentiment among short-term strategists also supports this pattern. As a bear market bottom approached, they often cut equity allocation recommendations sharply. As a bull market top approached, equity allocation ratios usually rose only modestly, sometimes barely changing at all. In other words, the market does not necessarily issue a clear warning before topping out. More often, participants gradually lose excitement, and trading enthusiasm is replaced by fatigue and a wait-and-see stance.
Applied to the current market, this pattern is not unfamiliar. The Dow Jones Industrial Average and the Nasdaq Composite are down about 4% from their all-time highs, while the S&P 500 is off by less than 2%. The volatility index also remains below its long-term average. Judged by these data alone, U.S. stocks appear to be consolidating at high levels rather than entering a typical panic-driven decline.
Still, a calm tape does not mean risk has been eliminated. Some analysts focused on extreme market signals believe that recent divergences within the market may point to a 10% to 15% pullback for the S&P 500. The Nasdaq and small-cap stocks could see even more pronounced volatility. Other views stress that even a pullback of that size would not necessarily signal the end of the current bull market.
