Signs of stock market top

There are currently quite a few signs that we are near stock market top:

1. Excessive valuation

The stock market valuation is above the historical norm. Q ratio is second highest in history. Shiller PE is over 27. When the market turns, the value conscious investors will stay away.

2.  Extreme bullishness

Even minor market dips are heavily bought. Cash allocations are low. Margin debt is high. Investor sentiment is extreme.

3. Final push/overshoot

Everyone wants to buy in a fear of missing out and no-one wants to sell. This can result in a final rapid price appreciation that stands out and makes the overvaluation just more obvious. Think about climbers reaching a summit and asking "now what?". The 10%+ price run a matter of weeks qualify as significant movement. 

4. Deterioration of market breath 

Healthy market moves in unison. Strong bullish tide carries all stocks. When this starts breaking down (more stocks making new lows, more stocks below long term moving averages), the market is about the hit an air pocket.

5. Rolling over of leading indicators

The unprecedented monetary stimulus has made leading indicators less useful in this business cycle. The current expansion is one of the longest and weakest. Looking OECD indicators, the global growth is continuously weak, near the stall speed. The US based private research company ECRI's weakly leading index growth is also negative.

6. Widening of credit spread

The credit spread, difference between high yield and treasury bonds is on the rise signaling risk aversion. This correlates well with stock market.

7. Money flows into defensive stocks (utilities and consumer staples)

This is the classical market timing method. The current bull market is a bit confused but utilities and consumer staples have been the strongest performers indicating defensive stance.

8. Increasing volatility and "nervousness"

Small daily movements become wider daily swings. The market leaders suddenly hit air pockets. Apple losing 5% intra day qualifies.

9. Emperor has no clothing moment

A wide spread recognition that something everyone already knows may actually matter. For example, everyone know in 2000 that valuation was high. Then suddenly PE>150 actually mattered. For example, housing bubble in 2008 was obvious but it did not matter as housing never went down. Until it did. Currently, everyone knows stock market is a bubble but it does not matter because of central banks. But suddenly this will change and everyone will know that everyone knows that this is a bubble.

In summary, all the ingredients for market top are in place. All that is missing is the "emperor has no clothing" moment.