The stock market can arguably be unpredictable. Sometimes it’s up that suddenly plunges unexpectedly. If you’re a stock investor, you understand that there is no 100% accurate stock market prediction that works consistently. However, there are ways you can predict the dips and outright crashes to guide your immediate or future investment undertakings.
What’s Stock Market Crash?
Sometimes you realize that a drastic decline in stock prices affects almost the entire stock market. Stock market crashes mostly result from high selling activities by investors due to fear, uncertainty, or panic. Crashes are controlled by psychology, behavior, and external economic events that push investors to sell their stock, lowering prices. As a result, the stock supply becomes high while the demand either reduces or remains constant.
Most people prefer to buy during crashes with hopes of selling when the prices finally go higher. Investors use many strategies to predict a decline in stock prices. Most investors study trends, charts, calculations, and formulas based on the past, current, or future predictions of statistics and behavior.
Here are some indicators that may help you predict upcoming stock market crashes amid your trading journey:
1. When Profit Margins Begin to go Flat
The main aim of investing in the stock market is to get profits. So, it’s useless to invest in an investment that isn’t showing any signs of profits in the future. On the other hand, better profit margins indicate a good ROI, hence, attracting more investors. Most investors utilize the price-to-price ratio or price to earn to know whether the stock is overvalued or undervalued. When the process goes flat, it’s an indication that there could be an upcoming crash. Amid economic uncertainty, consumer spending goes down for a lack of confidence and market uncertainty. This pushes many investors to abandon the trade hence reducing the prices.
2. Bubble in Market Valuation
If you’ve been a longtime stock investor, you must have witnessed bubbles in the market at one point. For instance, there was a real estate bubble seen in 2000. In that case, there was excess stimulus in the market backed by poor lending activities leading to high property prices. However, the popping of the bubble led to a massive sell-off leading to a recession in 2007. There was one of the longest bull run ever experienced in history after the downturn that stopped during the outbreak of the Coronavirus. Such bubbles are good indicators of a possible stock market crash. You can use tools such as harmonic patterns indicator for NinjaTrader to help you predict the crashes after you’ve witnessed a substantial bubble.
3. Rising Inflation
Inflation may be natural. However, as the economy progresses, services, goods, and other products will witness a serious price increase at an alarming rate. A cute inflation rise may be disastrous to the stock market. The US federal reserve advises that inflation should rise to approximately 2% as the healthiest rate for any price increase. During rapid inflation, you should expect an upcoming stock market crash. Price rises cause tension, and consumers may become conscious of their spending. So, reduced corporate profitability leads to a crush on the stock market.
4. Rampant Speculation
Many people fear investing after hearing speculations relevant to stock market crushes. When there is no positive feedback concerning the stock market, you will experience high prices of stocks hence creating some bubbles. Any bubble in the stock market is translated as a possible trigger to a market crash. Extended bubbling leads to a crucial crash that may not be recovered in the long run. In such cases, you should be cautious because if you continue investing, you may lose your money. Therefore, speculative bubbles should not be ignored until there is a peak.
5. Low-Interest Rates
If there is a lot of money in the stock market, you may experience a substantial bubble. This normally happens when central banks lower interest rates by offering incentives to banks, thus generating more money through fraction reserve lending. This undertaking leads to a crash in the long run. More money in the market leads to crowding and mal-investment, so stocks and real estate asset classes get heated. In the long run, the central bank may not be in a position to withstand the bubble caused by flat money. It raises the interest rates to control inflation, leading to a decrease in asset prices.
Remember, whenever there is a bull market, you may be tempted to change your investment plans because there is a fear of a market crash. Uncertainty controls how people behave toward stocks investment. However, it would be best if you were alert for any of the above possible stock market crash indicators. Interestingly, crashes don’t last forever, so you shouldn’t be worried especially if you’re well prepared.