The biggest sell-off in shares since early 2009 has left investors asking themselves whether the bull market is now over. A lot of people's gut feeling is that it is. But there's no need for us to rely on human instincts here. Instead, we can look back at previous market tops to see what history tells us about today's situation.
Try to keep up
Like any moving object, the stock market tends to slow down before it changes direction. Rather than surging to a new high and then reversing, it tends to lose speed well before the actual turning point is reached. There are lots of ways to measure the market's speed or 'momentum', but one of the easiest to grasp is the relative strength index (RSI).
In 14 out of 15 bull markets since 1928, the weekly RSI has turned down in advance of the Dow Jones Industrial Average. The lone exception was in 1968, when price and momentum climaxed simultaneously. On average, the Dow has registered a peak reading of about 80 per cent some 70 weeks before the price top. However, on five occasions momentum has rolled over some 35 weeks before the Dow itself.
