Procedure in Forecasting Tops and Bottoms of Major Stock-Market Swings
The foregoing tests and barometers furnish the basis for determining the normal peaks and valleys in the major swings of the stock market. They are the fundamental factors and must have their way sooner or later. Before summing them up in such a way as to facilitate a comprehensive and practical analysis, however, it is necessary to recall that stock movements sometimes run to excesses both at peak and at bottom.
As the market nears levels which are indicated to be fundamentally unsound and dangerous, there are two possibilities: it may show symptoms of the approaching crash or it may not, but continue to rise, passing all fundamental danger signals. Of course it may, and often does, react about the time a crash is due, but it may then recover and run ahead. Similarly, on the decline a bear market may run abnormally low. This depends upon the extent to which speculative motives and sentiment have come to predominate over investment motives and reason.
Accordingly, toward the tops and bottoms of major swings the forecaster is likely to be called upon to answer the question Is it probable that there will be a sustained departure from normal investment considerations? Here we are, at what should normally be the approximate peak; will inflationary forces and excessive optimism carry the market higher? Or if there is reason to think that stocks are low enough in a bear market, may not the violence of deflationary forces and excessive pessimism carry them to subnormal depths?
Of course, too, the same considerations may prevent the full attainment of the normal peaks or bottoms. Perhaps,