M&As: Beware of This Major Sign of a Stock Market Top

Here’s what often precedes “prolonged and devastating bear markets”

By Elliott Wave International

Inside the three publications that comprise Elliott Wave International’s flagship Financial Forecast Service, Elliott Wave International recently documented the many expressions of “financial optimism.” Things like crypto mania. Or meme stocks. Or just buying any stocks, all stocks, no matter if the companies that issued them are making money, losing it, or have yet to turn a profit.

And it’s more than just the individual investors who are caught up in it. Among the other behaviors this widespread financial optimism leads to are corporate mergers and acquisitions.

A corporate merger here or there may have little significance. However, when the biggest one in history occurs as part of a trend of a rising number of M&As — beware.

Consider a historical case-in-point: This is from the February 2000 Elliott Wave Financial Forecast, a monthly publication which provides analysis of major U.S. financial markets:

The euphoria surrounding AOL’s purchase of Time Warner may mark the top. As The Wall Street Journal put it, “The deal was heavy with superlatives and symbolism. It would be the biggest merger in history yahoo!”

That purchase had occurred about a month earlier [Jan. 10, 2000], which was within days of the Dow’s high.

As Robert Prechter’s At the Crest of the Tidal Wave noted:

Companies express optimism by taking over other companies. Such activity is indicative not of minor bull market tops, but of ones that precede prolonged and devastating bear markets.

That optimism was again evidenced for much of 2007. In January of that year, the Elliott Wave Financial Forecast again issued a cautionary note:

The other incredible expanding story is the “staggering” size and volume of corporate acquisitions. Newsweek and countless other articles find the rash of “bigger and bigger” deals “Phenomenally Positive” for the stock market.

Instead, later in 2007, the stock market hit another historic top.

This brief review of 2000 and 2007 is relevant in these early days of 2022. Here’s a Jan. 18 headline (CNBC):

Microsoft sets record for biggest tech deal ever, topping Dell-EMC merger in 2016

The headline is referencing Microsoft’s purchase of Activision Blizzard.

Ironically, this is unfolding as technology stocks are being punished.

Could this purchase by Microsoft be a sign of another stock market top?

Of course, only time will tell.

One thing’s for sure: the Elliott wave model is sending a major message which every investor should know.

If you’d like to learn about the Wave Principle, the definitive text on the subject is Frost & Prechter’s Elliott Wave Principle: Key to Market Behavior.

Here’s a quote from this Wall Street classic:

The Wave Principle often indicates in advance the relative magnitude of the next period of market progress or regress. Living in harmony with those trends can make the difference between success and failure in financial affairs.

Good news: You can read the entire online version of the book for free.

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