Top Three Rules for Spotting Market Tops

Accounting irregularities equal sell. It’s that simple. Don’t think – just sell. It’s not just that lying about numbers is illegal, it’s that companies that have to lie can’t make their numbers. Sometimes you’ll be wrong, but more often you’ll be right.

And, no, options backdating is not an accounting problem. It’s a compensation problem. But companies that backdate options for their officers don’t do it because business is bad, they do it because business is good. Those executives would rather take stock than cash. If anything, options backdating can be a reason to buy a stock, not sell one.

Home Gamers should also watch for overexpansion. The Street loves growth, and often that comes in the form of acquisitions and rapid expansion. But sometimes this is also a sign you should get out. The same goes for frenetic store openings or office expansions. Watch for the code phrase: integration problems. When you hear those words, run for the exits.

Overexpansion is easy to spot in retail, too. A growing store count is great, but when you see it up big relative to a retailer’s base – that’s a sign of weakness and not strength. And when you see a retailer with a presence in all 50 states, that’s a top. They’ve run out of room to grow, and no growth means the stock is about to take a long slide down.

The last sign of an impending top is government intervention. The government, at the federal or state level, can do more to hurt a company than any competitor. Be sure to read the big newspapers – The New York Times, Wall Street Journal, USA Today, Washington Post – and don’t just stick with the business section because it never pays enough attention to Washington.

Questions? Comments? madmoney@cnbc.com

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