What Is a Climax?

A climax occurs at the end of a bull or bear market cycle and is characterized by escalated trading volume and sharp price movements. Climaxes are usually preceded by extreme sentiment readings, either excessive euphoria at market peaks, or excessive pessimism at market bottoms.

Key Takeaways

  • A climax occurs at the end of a bull or bear market cycle and is characterized by escalated trading volume and sharp price movements.
  • Climaxes are usually preceded by extreme sentiment readings, either excessive euphoria at market peaks, or excessive pessimism at market bottoms.
  • Essentially, climaxes are a result of supply and demand factors.

Understanding Climax

Climaxes often occur at the end of bull or bear cycles. Investors become complacent to the risks inherent in markets, and believe strongly that the trend presently in place is not going to reverse course in the near term. Shorter-term climaxes may be the result of new announcements or developments pushing a value to new levels. Essentially, climaxes are a result of supply and demand factors. They occur from a last rush of investors who buy into a rising market or sell into a declining market. In both situations, a climax usually signals the end of a strong bullish or bearish market trend.

Buying Climaxes

One of the clearest signals of the end of a bull market is a buying climax, during which volume escalates to extreme levels and bullish euphoria permeates media coverage of stocks, market indices, or commodities. The key trait of a buying climax is the exhaustion of demand as the last buyers enter the market. The final surge of buying typically leads to price spikes, which may last for days, weeks, or months. As demand wanes, buyers become less willing to pay higher prices. There may be a brief period of stagnation in prices before a combination of profit taking and new sellers set in motion the start of a sharp reversal.

The end of the tech bubble in the year 2000 is a prime example of a buying climax. Starting in November 1999, the NASDAQ Composite gained 65% on its way to its buying climax high of 5,132 in March 2000. During this time frame the index saw steadily increasing volume based on euphoria over the New Economy. Over the following 30 months ending in September 2002, the index declined by 76%.

Selling Climaxes

The beginning of a selling climax is often signaled by steadily increasing volume on the sell side of the market as growing pessimism accelerates the downtrend. As the selling climax approaches, the last buyers finally capitulate, driving shares sharply lower. Once the supply side of the market abates, demand at support levels can cause the price to level off before a combination of profit taking and new buyers set in motion the start of a sharp reversal.

A rebound in oil prices in early 2016 is an example of a selling climax. After making a high in June 2014, oil prices declined steadily for 17 months, capped by a selling climax in January 2016. After making its selling climax low of $26.55 per barrel on Jan. 20, 2016, oil prices appreciated by 80% over the following four months.