There are many ways to predict the bull's top and bear's bottom in investment market. And normally, an investor will cross reference with different methods to determine the market trend. Technical analysis is a useful tool to provide indication of a possible top or bottom too.
I observe the market reaction to news in order to know the current position of the market in a long term trend. This simple method is useful for long term cycle, but not enough for short term cycle.
The market sentiment always react to news, announcements, happenings, rumours, etc. We can divide them into good news and bad news, and we can grade the news into 5 degree of impact or intensity.
Here are some examples of good news: good quarterly financial result, good industry outlook, positive announcement, new major development, good dividend payout, bonus issue, buying of shares by big investor, encouraging government policy, etc.
Here are some examples of bad news: poor quarterly financial result, poor industry outlook, negative announcement, fraud case, natural disaster, warfare, economic downturn, high inflation, substantial selling of shares from major shareholders or directors, discouraging government policy (such as impose of heavier tax), etc.
And here are some examples of news that can be viewed as good during bull market, but viewed as bad during bear market: rights issue, merger & acquisition, major investment in new area, increase in borrowings to fund rapid developments, etc.
And here are my observations:
During the bull market, majority investors will treat:
- good news as reason for the price to break another record high
- no news as if good news is coming soon
- bad news as if no big deal (ignored)
During the bear market, majority investors will treat:
- good news as if no big deal (ignored)
- no news as if bad news is coming soon
- bad news as if tomorrow is judgement day
And when it is near the bear's bottom, the damage from bad news reduced to minimal, and the market starts to realise and react to good news.
And remember, we have to divide the news into 5 degree of impact. The market might not react significantly to 3rd degree of impact, but still react vigorously to 5th degree impact. When it reaches the bear's bottom, even high degree bad news such as recession throughout the whole region will be treated as normal; and when it reaches the bull's top, high degree good news such as 300% profit growth will also be viewed as normal.
If you can observe and predict the bull's top and bear's bottom, then you can apply your investment strategy to "buy low and sell high".