This article first appeared in Forum, The Edge Malaysia Weekly on November 2, 2026 - November 8, 2026

Markets are near record peaks in current stock markets, especially in the US. Many market pundits think that a bubble is already with us. We do not know when the bubble will peak, nor what will trigger the reversal, but history has given us a double top pattern in bubble behaviour that may be useful for investors to bear in mind.

The classic definition of a double top is two peaks at roughly the same price level, separated by a meaningful pullback, then a fast and sharp drop thereafter. This is a classic investor psychology pattern that has occurred periodically at major market tops. Sometimes it is called a “double peak with late higher high” or what is known as a second peak “bull trap”. The second peak looks like “the bull is back”. That is the trap if the bull turns out to be a bear.

This phenomenon was observed in the 1929 Great Crash, when the US Dow Jones first peaked in March 1929 to 320, with a minor decline of approximately 15% pullback into May 1929, then a higher peak achieved on Sept 3, 1929 when the Dow recorded 386, a new all-time high. Thereafter, there was an 89% collapse over three years leading to the 1930s Great Depression.

Older Asian investors still remember the 1973 Hong Kong stock market bubble, when the Hong Kong Hang Seng Index first peaked around 1,200 in late 1972, with a pullback of roughly 15% correction, before moving to a second higher peak of 1,774 in February–March 1973. This was followed by a collapse of nearly 91% to 150 by December 1974. The second peak was 50% higher than the first, and then a painful lesson for euphoric investors.

The 2000 dotcom or internet tech bubble exhibited the same pattern. The Nasdaq index first peaked on March 10, 2000 to 5,048, with a sharp correction of 37% into May 2000, then a rebound to the second peak in September 2000 of 4,200 before a 78% decline by October 2002. Those tech companies that survived the dotcom bust such as Apple, Amazon and Google became tech giants today.

In the 2007/08 global financial crisis, the S&P 500 exhibited the first peak in July 2007 of 1,555, before a 10% pullback in August, then a second, higher peak on Oct 9, 2007 of 1,565 before a 56% drop by March 2009.

Experienced market investors attribute human psychology to this double top pattern. Investors are driven by greed and fear at the same time. Those who are very greedy go for leverage or margin trading, whereby they borrow to fund their investments. The more they borrow, the more volatile the market, because they must reverse their buying in order to stop losses multiplied by the degree of leverage.

In markets where volatility is high, the “buy the dip” crowd steps in to drive prices higher, and in recent years there is less fear as many investors, including fund managers, assume that central banks will always step in to rescue the market by lowering interest rates or injecting liquidity to the system. This “moral hazard” is the bane of market discipline, because when markets or institutions become “too big to fail”, market prices fail to correct because of the belief that governments will bail out the vested interests for fear of overall financial instability.

There is also a fundamental reason why the second peak is often difficult to sustain when it reverses. In the first peak reversal, many investors would have made money and have sufficient staying power if the market pulls back. But when they are driven to “buy on the dip”, especially those who borrow on margin, their staying power is weaker after the second new high, so they may be forced to liquidate positions, driving the market even lower.

This second peak sucks in late buyers, and if the market turns, the losses for those who have lost their capital or savings in the first drop and are hoping to recoup in the second peak are so severe that they will truly lose their shirt. That is why the second drop is often sharper and longer than anticipated. The second rout may also be the point when the central bank or government could decide that trying to stop the market drop may be foolhardy since they want to keep their powder dry to take action at more defensible levels.

The same pattern was seen in the China stock markets in the 2015 A-share bubble, which first peaked at 4,900 in early June 2015, with a pullback of 8%-10% mid-June, and a second higher peak to 5,178 on June 12, 2015, which then reversed by nearly 45% in 2½ months due to a cascade of margin calls. The rout was severe, because of the large retail investor participation, which accounted for roughly 70% of A-share trading. With a smaller institutional presence, there was insufficient institutional buying to stabilise the market at lower but more defensible prices.

In short, this double topping phenomenon structure is a universal behavioural pattern that investors need to appreciate, particularly where market sentiment and retail momentum play big roles. In Hong Kong, the tell-tale sign of a stock market bubble is when your taxi driver or maid starts buying on “hot tips”.

Of course, many analysts or fund managers continue to think that we are not in an artificial intelligence bubble because the US economy remains pretty strong due to the huge AI capital expenditure (capex) investments. First, outside the US, those who are benefiting from the huge AI capex investment, such as South Korea, Japan, Taiwan, Vietnam and Malaysia, are still seeing good gross domestic product (GDP) growth. Even China’s third-quarter GDP numbers are sustained by the tech sector growth.

Second, with 10-year US Treasury yields at above 5%, and oil prices remaining high, there are those who agree that interest rates will be higher for longer, but if the market drops, the US Federal Reserve will have room to cut rates aggressively. Third, there is still ample liquidity in the markets, as institutional investors and family offices are sitting on three years of strong stock market gains. Fourth, with several AI initial public offerings coming, there is a lot of expectation that AI revenue may expand to justify their large capex. Finally, the rich countries still have some room to expand fiscal stimulus even though debt numbers are already at historical highs.

My own reading is that there are ample reasons for market caution, so those who are highly leveraged or vulnerable to tight market liquidity squeezes or higher interest rates should be more prudent than ever. The experienced investor remembers that the second peak is where the smart money sells and the late money buys. In truth, buyer beware. Know what you are buying and how much risk or loss you can really bear. The bull may be generous, but the bear can be very unforgiving.

Tan Sri Andrew Sheng writes on global issues from an Asian perspective

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