Editor's note: Market bottoms are events – but market tops are processes...

Extreme Value editor Dan Ferris says it's important to remember that bull runs don't end all at once. Instead, investors have to look for signals that tell them when the good times are starting to get shaky. And according to Dan, current market activity proves that the end is near...

In short, he says the "tide of battle" is turning against the market. And while the ride higher might not end tomorrow – or even next month – it's time to start preparing now...

This weekend's Masters Series is adapted from the February 26 Digest. In the first part today, Dan reveals the contrarian indicator that tells him a market top is looming... details what one disruptive-technology fund's performance says about today's investing environment... and explains what it means for your portfolio...

This Is the 'Beginning of the End' for the Bull Market

By Dan Ferris, editor, Extreme Value

Not everyone can scoop the Economist...

But a few months ago, I did.

In the February 11 Digest, I highlighted the ballistic price charts of ARK Investment Management's several innovation-focused exchange-traded funds ("ETFs")... And I explained why I believed this firm was "the Mother of All Signs of an Impending Top."

I called ARK founder Cathie Wood "the Gerald Tsai of today"...

As I noted, Tsai was the most famous investor of the 1960s "go-go" era stock-market bubble. He generated outrageous returns during the bubble... then his popular Manhattan Fund became the worst-performing mutual fund in the world during the ensuing bust.

Two weeks later, the Economist jumped onto the ARK bandwagon...

The financial publication pointed out in its Buttonwood column that ARK's flagship fund – the ARK Innovation Fund (ARKK) – is the largest actively managed ETF in the world. And the publication referred to Wood as "the investment manager of the moment."

Unfortunately for ARK and Wood, this seems like it may have been another example of "the Economist indicator"...

As I explained last November, the Economist (especially the cover story) is a well-known contrarian indicator. I noted that even the magazine itself knows there's some truth to that...

This phenomenon is apparently so undeniable that the Economist published an article in October 2016 about its own value as a contrarian indicator. The article was based on research by two Citigroup analysts, who examined 44 covers of the Economist from 1998 to 2016...

The analysts looked at returns 180 days and 360 days after publication. After 180 days, the Economist covers were a contrarian indicator 53% of the time – roughly a 50-50 toss-up. But after 360 days, the odds were better... A contrarian bet paid off 68% of the time.

A year later, buying after bearish covers of the Economist generated an average return of 18%... while selling short the bullish covers generated an average return of 7.5%.

ARK wasn't the cover story that week. But the indicator still appears to be in play yet again. You see, the Economist seems to have discovered Wood's prominence a little bit late...

The ARK Innovation Fund peaked at $156.58 on February 12 – perhaps coincidentally, one day after my initial Digest on the topic. Since then, it has dropped more than 20%... It's hovering at about $121 per share as we go to press.

It has been a similarly rough time for many individual holdings in the ARK Innovation Fund...

For example, electric-car maker Tesla (TSLA) – the biggest holding in ARKK, at roughly 10% – is down about 12% over the same span. And the stock has fallen roughly 18% from its late-January peak of $883.09 per share.

Other prominent holdings in the ARK Innovation Fund are down significantly over the past six months as well... Digital media company Roku (ROKU) has fallen more than 20% since mid-February, and video-conferencing software maker Zoom Video Communications (ZM) has dropped roughly 16%. Meanwhile, virtual health care company Teladoc Health (TDOC) has plunged an incredible 51% in that time frame.

After one particularly bad two-day rout in February, investors pulled their money out of Wood's company in droves... ARK's three largest funds saw $786 million of investor withdrawals in one day alone. And due to a combination of these withdrawals and price depreciation, the ARK Innovation Fund lost $3 billion in value in the blink of an eye.

Look, you can't take anything away from the performance of Wood's ETFs since their inception... They've helped a bunch of investors make a lot of money. And I can see why some folks – including the Economist – would reason that Wood is a brilliant fund manager.

However, you shouldn't forget the flip side to any incredible run higher. Volatility is a two-way street... to both the upside and the downside. As I wrote in the February 11 Digest...

I admit that founding her company based on disruptive-technology investing in 2014 was a stroke of genius. But I am 100% certain the ballistic trajectories of her ETFs and ARK's assets under management absolutely, positively will reverse course in the not-very-far future.

And like I said before, ballistic trajectories don't level off and go sideways. They turn around and fall back to Earth.

So when it comes down to it... Yes, I'm feeling somewhat vindicated.

What I said on February 11 is still true... Wood and ARK's funds are still the Mother of All Signs of an Impending Top – if it's still "impending," that is. And the fact that investor money headed for the hills in record amounts amid 15% or 16% drawdowns back in February proves how investors speculating wildly at the top of a decadelong bull market can easily get spooked.

Market bottoms are events... Stocks fall, hit bottom, and turn back up. But market tops don't happen all at once... They're a lengthy process that can take years to unfold.

I'm not saying I successfully called the top. But if nothing else, I believe I successfully identified an important sign for investors to keep an eye on moving forward...

ARK's funds will crash. It's inevitable. That's what always happens when an asset's price goes ballistic, like what happened with these ETFs in the wake of the worst days of the COVID-19 pandemic.

It isn't sustainable forever.

Has the crash already begun?

I believe it has.

And that's the simple message of the unfolding ARK saga...

The "beginning of the end" has arrived.

It's as if the standard bearer in a battle has been mortally wounded and thrown from his horse. He's dying on the ground, his flag lying in the mud and a pool of blood... His side might still be in the fight, but most of his comrades don't realize that the tide of battle has turned against them.

And just so we're clear, by the "beginning of the end," I mean...

This is the beginning of the end of the bull market that started at the bottom of the great financial crisis in March 2009 and continued with just one extremely unpleasant episode, courtesy of government responses to COVID-19 roughly a year ago.

Since tops aren't events but rather processes, it's most appropriate to say...

"The top has begun to form."

That doesn't mean we won't still see new highs in the benchmark S&P 500 Index, the tech-heavy Nasdaq Composite Index, or the Dow Jones Industrial Average.

It doesn't mean you can't own stocks at all.

It doesn't mean that if you own "Melt Up" beneficiaries like Tesla, Roku, Riot Blockchain (RIOT), and many others, you should sell your shares immediately.

But you should definitely view these stocks as trading vehicles only... and not long-term wealth builders. Be mindful of your stop losses with all of these positions.

And like my colleague Dr. Steve Sjuggerud often tells readers of his free DailyWealth e-letter... when you hit a stop, you sell.

I'll leave you with that initial takeaway today.

And then tomorrow, I'll share two key assets that I believe can help you ride out the inevitable "Melt Down" – and even profit – when it arrives.

Good investing,

Dan Ferris

Editor's note: Dan believes a top is forming in this decadelong bull market... and investors who chase "hot" stocks to irrational heights will lose a lot of money very soon. But it isn't all bad news...

Fortunately, there's a way to reduce your risk – and improve your chances of succeeding – by following a proven strategy that helps you take the emotion out of your investments. It's a strategy that Dan has used to help his subscribers reap incredible rewards over his decadeslong career – including gains as high as 406% on Prestige Brands and 629% on Constellation Brands.

According to Dan, it's critical to look for five "must have" criteria before putting your hard-earned money to work in any opportunity. And for a limited time, he's "pulling back the curtain" on this strategy. Watch Dan's full presentation right here.