How to benefit from the top and bottom in the markets?

Now-a –days all of us are calculating in our mind how much we would have earned if we
had sold some of our holdings in January (Sensex at 21000) and bought some good
quality undervalued stocks now (Sensex at 15000).
The questions is how we could have identified before the markets fell that markets are
near their peak and sold at least a part of our portfolio to lock in some profits and keep
cash in handy for buying after the fall.
Indicators of a top in markets are:
 Everyday people are present either in broker’s office or in front of the trading
terminals at exactly 10:00 AM.
 We look at our portfolios at least 3-5 times a day and calculate each time how
much we have earned that day.
 Everyday many unknown penny stocks hit upper circuit of 10% or 20% making
new 52 week high.
 There is no effect of any bad news on a particular company, sector or market as
applicable.
 Suddenly you find analysts recommending stocks which you have never heard of.
 You go to a party /social gathering and you find everybody discussing about
stocks most of the time.
 People generally shy of equities and no knowledge of equity markets like
gardeners or drivers start investing aggressively.
 When you tell somebody that you made a profit of 20- 30 % in equities this year
and people feel sorry for you as they expect returns to be at least 70—80% .
 Companies which are loss–making and out of business start to rise unexpectedly.
 Analysts dump the traditional valuation methods and find new ones to justify the
rise of markets (Example china trading at higher valuation then India so markets
should go up or value of land assets should be included in the price etc.).
 Suddenly you find number of shares being traded on exchanges dramatically
increasing (It actually happened in October-December 2007 quarter when this
figure went up from 1000 to 2500).
 You have 40-50 stocks in your portfolio and still feel that you should buy few
more.
 You are not happy with the stock exchanges for putting an upper circuit filter of
5%, 10% or 20% each day on the individual stocks.
Indicators of a bottom in stock markets are:
 People do not want to have a look at their portfolios at all for many days.
 Everyday many unknown penny stocks hit lower circuit of 10% or 20% making
new 52 week low.
 There is no effect of any good news on a particular company, sector or market as
applicable.
 Suddenly you find analysts recommending people to stick with blue chips only.
 You go to a party /social gathering and you find everybody discussing why people
should stay away from stock markets.
 Suddenly you find number of shares being traded on exchanges dramatically
decreasing.
Learning of the week:
While it is impossible to exactly identify the top and bottom of the markets we can have a
sense that we are near the top by using above signs as indicator and have some cash
(5-20% recommended) in our portfolio. Similarly we can start buying good qualityundervalued
stocks when we find markets are near their bottom.