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Rounded Tops and V-Shaped Bottoms

By Matthew Kerkhoff

 

There are enough Wall Street adages to fill a book, evidenced by Mark Skousen’s The Maxims of Wall Street. Some hold great wisdom while others are relics of an older time. One that is relevant to the current investment climate is: Be quick to turn bullish, slow to turn bearish.

 

The idea here is that major market tops tend to develop over a longer period of time than market bottoms. That is, market tops tend to be long, drawn-out affairs while market bottoms are quick and snappy.

 

Explanations for this phenomenon are generally rooted in behavioral psychology, centered around fear and greed. The theory goes like this:

 

During bear markets, fear tends to be the dominant emotion as asset prices collapse and investors wonder just how bad things will get. This leads to bear markets lasting longer than anticipated and reaching extremely oversold conditions. At the point of capitulation, the fear of ... Log in or subscribe to continue reading.


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