/market-top-detector

Market Top Detection Methodology

Overview

This framework integrates three proven approaches to market top detection, each targeting different aspects of institutional behavior that precede significant market declines (10-20% corrections).

The Three Pillars

Pillar 1: O'Neil - Distribution Day Accumulation

Source: William O'Neil, "How to Make Money in Stocks"

Core Concept: Institutional investors (mutual funds, hedge funds, pensions) cannot sell their large positions in a single day. Their selling creates a distinctive pattern: the index declines on higher-than-previous-day volume. When these "distribution days" accumulate, it signals that smart money is systematically exiting.

Distribution Day Definition:

• Index declines >= 0.2% from previous close
• Volume is higher than previous day's volume
• Both conditions must be met simultaneously

Stalling Day Definition:

• Volume increases from previous day
• But price gain is minimal (< 0.1%)
• Indicates institutional selling into strength
• Counted at half weight (0.5 distribution days)

25-Day Window:

• Distribution days expire after 25 trading days
• Only the rolling 25-day count matters
• This prevents old events from distorting current assessment

O'Neil's Warning Thresholds:

• 4-5 distribution days in 25 trading days = "market under pressure"
• 6+ distribution days = "distribution is heavy, protect capital"
• Combined with stalling days for full picture

Pillar 2: Minervini - Leading Stock Deterioration

Source: Mark Minervini, "Trade Like a Stock Market Wizard" / "Think & Trade Like a Champion"

Core Concept: Market tops do not appear suddenly. They develop through a process where leading stocks - the strongest performers of the previous rally - begin breaking down before the major indices. This is because institutional investors sell their biggest winners first to lock in profits.

Key Observation from Monty Article:

"弱気相場の初期段階では、特定の主導株が下降トレンドに抵抗するかのように強く、上昇できるという印象を与えます。" (In the early stages of a bear market, certain leading stocks appear to resist the downtrend, giving the impression they can still rise.)

Detection Method: Using a basket of growth/innovation ETFs as proxy for market leadership:

• ARKK (Innovation), WCLD (Cloud), IGV (Software)
• XBI (Biotech), SOXX/SMH (Semiconductors)
• KWEB (China Tech), TAN (Solar)

Deterioration Signals per ETF:

1. Distance from 52-week high (>10% = concerning, >25% = bear territory)
2. Price below 50-day moving average
3. Price below 200-day moving average
4. Formation of lower highs pattern

Amplification Rule: When 60%+ of leading ETFs show deterioration, the signal is amplified by 1.3x. This reflects the systemic nature of leadership breakdown.

Pillar 3: Monty - Defensive Sector Rotation

Source: monty-trader.com "米国株 株式相場の天井の見極め方と下落局面でやるべきこと"

Core Concept: Before a market top, capital flows from offensive/growth sectors into defensive/value sectors. This "rotation" occurs because institutional investors are becoming defensive while maintaining their equity allocation. It's a critical early warning signal.

Defensive Sectors (Safety Seekers):

• XLU (Utilities) - stable cash flows, bond-like
• XLP (Consumer Staples) - recession-resistant demand
• XLV (Healthcare) - non-discretionary spending
• VNQ (Real Estate) - income-focused

Offensive Sectors (Growth/Risk):

• XLK (Technology) - growth-dependent
• XLC (Communication Services) - ad-spend sensitive
• XLY (Consumer Discretionary) - economically sensitive
• QQQ (NASDAQ 100) - tech-heavy growth proxy

Signal: When defensive sectors outperform offensive sectors over a 20-day rolling period, capital is flowing defensively. A relative performance spread of +3% or more is a strong warning signal.

Supplementary Components

Component 4: Market Breadth Divergence

Concept: When the index makes new highs but fewer stocks participate, the rally is narrowing and vulnerable. This "divergence" between index price and market breadth is a classic top signal.

Key Metric: Percentage of S&P 500 stocks above their 200-day moving average.

• Healthy market: >70% of stocks above 200DMA
• Warning zone: 50-70% with index near highs
• Critical: <50% with index at highs

Important Nuance: Breadth divergence is most meaningful when the index is near its 52-week high (within -5%). If the index has already corrected significantly, weak breadth is expected and less informative.

Component 5: Index Technical Condition

Moving Average Structure:

• Healthy: Price > 21 EMA > 50 EMA > 200 SMA
• Deteriorating: Any of these relationships inverting
• Bearish: Price below all major moving averages

Pattern Recognition:

• Failed Rally: Price bounces but fails to exceed recent peak
• Lower Highs: Sequential swing highs declining
• Gap Downs on Volume: Institutional panic selling

Component 6: Sentiment & Speculation

VIX (Fear Index):

• <12: Extreme complacency (warning)
• 12-16: Low volatility (mild warning)
• 16-20: Normal

• 25: Fear elevated (top less likely, correction may be underway)

Put/Call Ratio:

• <0.60: Extreme call buying (maximum complacency)
• 0.60-0.70: Elevated optimism
• 0.70-0.80: Mildly bullish

• 0.80: Healthy caution

VIX Term Structure:

• Steep Contango: Market expects calm (complacency signal)
• Backwardation: Hedging demand elevated (fear present)

Follow-Through Day (FTD) Monitor

O'Neil's concept for bottom confirmation, relevant when composite score > 40:

1. Rally Attempt Day: First day the index closes up after a decline
2. Counting begins: Day 1 of potential new uptrend
3. Follow-Through Day: On days 4-7 of rally attempt, a strong gain (1.5%+) on higher volume than previous day
4. Significance: "The most powerful uptrends usually begin with a Follow-Through Day on day 4-7"

False FTD Rate: Approximately 25% of FTDs fail. Multiple FTDs increase confidence.

Scoring Philosophy

Why Weighted Composite?

No single indicator perfectly predicts market tops. Each pillar captures a different dimension:

• Distribution Days: Direct measurement of institutional selling
• Leading Stocks: Quality of market leadership
• Defensive Rotation: Institutional positioning shift
• Breadth: Market participation health
• Technicals: Price structure integrity
• Sentiment: Psychological extremes

Weight Rationale

• Distribution Days (25%): Most direct measure of institutional behavior
• Leading Stocks (20%): Minervini's strongest conviction signal
• Defensive Rotation (15%): Monty's key differentiator
• Breadth (15%): Classic confirmation signal
• Technicals (15%): Structural integrity check
• Sentiment (10%): Context and extremes (less reliable alone)

Calibration Principle

The scoring is calibrated so that:

• A "normal" healthy market scores 10-20
• An "early warning" market scores 25-40
• A market in the "initial to middle stage of top formation" scores 40-55
• A clear top formation scores 60-80
• A completed top with breakdown scores 80+