While we are starting to see the first signs of a correction in the stock market, history has shown that there are many similarities between toady’s markets and other markets prior to corrections. For those willing to take a step back form the euphoria of the stock market rise of the last few years, the signs of a correction have been there for some time – although some people are evening trying to shrug the signs off today!
Updated on December 2016 – chart below shows you what happended after this post was published 🙂
So what are the 5 main signs that stock markets are due for a fall :-
Constant Rumours Of Corporate Activity
The last few years have seen masses of takeover and merger rumours, some of which look plain stupid in the cold light of day, but in the hustle and bustle of a perceived bull market, they often make sense to some people.
In today’s environment, good results are seen as a sign of more profits to come, with share prices marked higher. Lower profits or disappointing forecasts from the company are seen as weakening a company’s chance of staying independent, and we have seen many shares rise on the back of takeover rumours! Crazy.
One Asset Class Holding Up The Rest
While the UK and US economies have been heavily supported by the rise in the value of property, this has masked many problems below the surface. There are even some who believe that while they are struggling at the moment, the continued rise in property prices will some how bail them out – but only if they sell before the markets turn!
Increased Personal Debt
This has been one of the main characteristics of the recent stock market rise, with investors increasingly taking chances with their investments, whether these be property or shares. As property prices push higher, more and more are chasing their dream home, and a big profit in a short time. It is not as simple as that – and mortgages agreed on terms in excess of six times combined salaries are suicide, and a great sign that the economy is start to creak.
The Lone Adviser Who Is Mocked
One of the most clear signs that stock markets are too high is when 99% of analysts and advisers are buyers of the market. Frightened of missing out on that big rise to come, and the problems which that will bring with customers, many are happy to follow the crowd even if fundamentally they do not believe the story.
There is always one lone voice in the darkness, the voice of reason who is ridiculed by those with the herd mentality, although very often it is the lone voice which has the last laugh.
When People Buy Stocks They Have Not Researched
This is one of the most sure signs that a stock market is ready for a correction – blind buying!
We saw this in the technology bubble of the late 1990s when investors where buying stocks which they had not researched. Many were then shocked to see valuations fall back sharply and did not quite understand what had happened. Blue Sky pie in the sky stocks are always the first to be hit, even at the slightest sign of bad news, because they have nothing to fall back on, they have no profits and just hope value.
For those willing to take a step back and appreciate the fundamentals of today, they may well see a different picture to the one portrayed in the financial press.