In this article we will give you 5 signs in Predicting a Stock Market Crash. The greatest fear for all investors is the surprise of a Market Crash. It’s not just the fall in stock values and the decline in portfolio value that investors fear. But it’s the fact that many investors will worry about their investments and will have seen the signs. Fact is, they just didn’t act.
Successfully investing in the markets requires a few key attributes:
- Understanding of stock price movements and influences
- Knowing how to analyse and define the Economic/Fundamental state of an economy and/or listed company
- Formulation of a view based on known information, or ‘prediction’ of what will influence the stock price in the future.
- Strategy
- Money to invest, and to diversify
- The confidence and discipline to stick with a proven formula, rather than trying to second guess what to do.
History has proven that stock markets will fall, they will rise, and they will usually do the opposite to what you had expected. It’s just Murphy’s Law! Fact is, I can guarantee that I know what the stock market will do tomorrow. Yes, guarantee!!
It will either Rise, Fall or remain Sideways. That’s it! There is nothing else the stock market can do.
As a Technical Analyst, we refer to this action as a Trend. A trend is a tendency for prices to move in a particular direction over time. So it stands to reason that if you could identify what trend the stock market was in, you would be able to invest in the markets more successfully.
5 Signs in Predicting a Stock Market Crash
TIP #1 – Identify the change in trend
If you can identify that a trend is changing, you are a mile ahead of the average investor. Predicting when a Stock Market Crash is imminent boils mostly down to trend identification. Most major stock market crashes have occurred after the trend has changed.
TIP #2 – Use Technical Indicators to remove the emotion
Technical Analysis has become so popular in the last 20 years due to its simplicity. Analysis of price activity is pure mathematics, but can visually be adapted by the least experienced investor quite successfully.
But beginners use Technical Analysis incorrectly as they attempt to predict the stock market movements rather than analysing and accepting what the charts and indicators are telling them.
Mathematics and stock price movements are synonymous. But emotions dictate stock price movements with eager buyers forcing prices higher, and panic sellers forcing prices lower. To use the simplest of trading mathematics, the Moving Average, you can clearly define whether or not the stock market (or individual stock price) is in an upwards or downwards trend.
For long-term trend analysis, the industry standard is a 100 period moving average. If the stock market leading index, such as the ASX200 for Australia or S&P500 for the US, fell below this 100-day moving average, then this would denote a technical change in trend.
TIP#3 – Don’t try to catch a falling knife!
One concept of a stock market crash that I have never been able to understand is why investors buy shares as their share prices are falling. Quite often I get orders to buy shares for clients with their analysis idea “it’s cheap at this price!”
Just because a stock price is cheap, doesn’t mean it won’t get cheaper!
If you’re trying to purchase shares whilst they are trending downwards (Tip 1 & 2), then you are attempting to Catch a falling Knife! It’s dangerous, and you have to be very lucky to not hurt yourself.
TIP #4 – Listen to the voice of the News
A Stock Market Crash is an emotional reaction to a series of events, driven by fear and uncertainty.
It has been noted from past stock market crashes that prior to the actual peak in the markets, or the actual stock market crash itself, news headlines and investor confidence typically tout positive returns and how successful investing has been. In fact, one predominant investor ahead of the 1987 stock market crash noted that his New York Cab driver was providing him with stock market tips, and this was the reason why he decided to sell all his shares!
News headlines that the stock market is crashing means it’s too late. And the newspapers and TV don’t provide ‘predictions’. They merely state the facts. So you won’t get any heads up that a stock market crash is on its way.
Hence, listen for euphoria out of the news headlines. And if you morph that in with some trend analysis, you are going to be 10 steps ahead of everyone else.
TIP #5 – Act on your judgement and consult a professional
Too often I have heard investors state “I knew the markets would fall”. Well, if you knew that, why aren’t you a multi-billionaire?
Our sixth sense when it comes to investing is actually quite good. Even beginner investors. We can sense that something is not quite right with how the markets are moving, but we can’t quite put or fingers on it.
But instead of taking action, most people will adopt the “I’ll wait and see” attitude. Of course, that almost always results in a loss.
While no-one can consistently predict what the stock market will do, or whether there will be a stock market crash tomorrow or the next day, when we are concerned about our investments, we can adopt strategies to manage our Risk.
Professional Hedge Fund managers consistently outperform the markets when there is uncertainty or falling markets. This is because they adopt strategies to ‘hedge’ against a fall. These strategies are easily adopted by the average investor. You just need to know what they are, and when to implement them. Hence, consult a professional.
Matthew Brown – US Stocks & Options specialist
Client Advisor
Halifax Investment Services
ASIC Australian Financial Services License Number – 225973
If you would like to learn more about the strategies you can use to profit from any type of market direction, visit the strategy centre or you can contact Matthew on brown@halifaxonline.com.au
Matthew is an Authorised Representative of Halifax Investment Services (Halifax). Halifax provides broker services, including Full Service and Discount Services using multiple trading platforms. For Discount platform services, Halifax charges the same fees for phone service as the online trading platform.
