Imminent Signs of Bubble Crash
Author: YUEN Wai Pong Raymond
This paper discusses the imminent signs of bubble crash.
As a professional investor, it is important to distinguish the imminent signs of bubble crash and avoid the hefty loss. According to Mr. Peter Lynch, the fund manager who grows Fidelity Magellan Fund from US$18 million in 1977 to US$14 billion in 1990 with annual return rate of 29%, he predicted the stock market top by the cocktail party theory. In fact, cocktail party theory is just one of the indicators of the top of the stock market. In the following article, we will discuss some of the signs of the crash of the stock market is coming. There are altogether 13 signs that we will discuss.
Cash is rubbish
When nobody is willing to hold cash, the cash has either been thrown into the stock market, property market or goods. The imminent dry up of liquidity is coming. Once the liquidity dried up, the market may turn into a bear market.
Difficulty in Finding Value Stock
At the top of the stock bubble, it is very difficult to find value stock. Per late Mr. Benjamin Graham's indication, value stocks are stocks with low PE, high dividend yield, high asset backing, low gearing, good management quality, strong balance sheet, strong operating and free cash flow. When you cannot find any stocks like that - be careful.
Technical Analysis Sign
When the chart shows shoulder-head-shoulder, double heads…. Or momentum thrust (75% of the stocks below 360 days moving average line) is weak, coppock indicator is dropping….
When the chart shows a good number of these signs, the imminent drop is coming.
Inflation, Interest Rate, and Money Supply
If the economy is experiencing inflation, it means that the real economy cannot sustain the money growth. The government may raise the interest rate and control money supply any time to prevent the wage - inflation spiral which is exhibited by the shifting of Phillip's Curve.
Opinion of Expert
At the top of the stock bubble, usually all financial experts are making optimistic prediction of the stock market and stock price.
At the top of the stock market, a lot of new stocks are listed in the market and a lot of people are subscribing for these news stocks. Some of the stocks are just too ridiculously to be listed. For instance, during IT bubble, a new stock was listed with prospectus mentioning that the funds would be used in IT project without concrete plan or projection figures. However, the stock still gathered US$28 million funds.
At the top of the stock market, we may see more news about insider trading. The insiders are usually some officials of listed companies who seldom trade stocks also try to profiteer from the fervent market.
No Effect of Good News
At the top of the stock market, even if there is very good news such as record earnings, record sales growth, and favorable government policies, the stock price still drops or stays the same. This shows that the market is fatigue.
Change in Leading Stocks
At the top of the stock market, a group of stocks from one industry that was the leading stocks suddenly lost their favor. Another group of stock from other industry takes up the leading effect. Then, it is sign that the market is not far from the top.
Cock tail Party Test (Per Mr. Peter Lynch)
When amateur investors starts to talk about stocks and teach the professional fund managers which stock should be invested in a cock tail party. It is sign of the top of the market.
When the weight of volume of call option is high, it is sign of a fervent market and the market may drop any time.
When a lot of small lot trading, it is a sign that the men-in-the-street are getting into the stock market. According to Mr. Andre Kostolony, this is the end of the bull market.
When the weight of short selling is low, it is sign of a fervent market and the market may fall any time.
Rapid Expansion of Mutual Fund and Hedge Fund
Some people seldom and dare not invest in stock directly; in a crazy market, they will give their money to the professional investors to invest such as fund manager of mutual fund and hedge fund. When you see record number of new investment funds being set up - be meticulous.
This Time is Different
When you hear comment saying that the red hot market will not collapse because "this time is different", it is a dangerous sign because all the purchasing power has been digested by the market. Remember the 1929 crash, before that, a good investor, Mr. Babson, warned about the crazy market. People laughed at him saying that this time is different. The market collapsed a few months later when the Reuter showed the comment of Mr. Babson. This is the famous "Babson Break".
Hope that this short article can raise our awareness of imminent stock crash and help us avoid the catastrophic effect of the crash on our savings and livings. God bless you in your investment venture.