Wednesday, June 22, 2011

Market warning bells

Market bells are ringing softly....can you hear it? When will the bells ring louder? You don't need to know how to read charts or value companies to know that the market is overheated. It can be as easy as paying more attention to the surroundings and people around you. These warning signs might not tell you the exact date in which the market will crash, but a rough estimate is better than none, so that you can make preparation in case it happens. Here's a few points that I can think of:

1. When newbies that comes to the market and start to make a lot of money without knowing anything at all, that will be one sure danger sign. In the market, newbies are supposed to lose money. If they earn anything, it's more by luck and only a handful of these newbies will survive because of their skills. Thus, when you see a lot of newbies who don't know how they made money, it's a sure sign that the market is overheating. If even the newbies are in the market, who else is going to buy the shares from you?

2. When the uncles and aunties you meet on the streets are talking about buying this stock and that stock, you'll hear the market bells ring louder. During the peak market, you can see actors and actresses busy buying stocks. People are talking about stocks in the lifts. Taxi drivers are also talking about them when you took the cab. Thus, when people who ordinarily have no interest in the market start to talk about the market, be careful.

3. When the analyst start making more calls to buy, it'll be another sign. The reports will be glowing with optimism and ever increasing target price (the target price are met so they have to upgrade again and again). Another thing I noticed is that they would shift the valuation benchmark to PE based, instead of asset based ratios like PB.

4. When the newspaper start to talk positively about the market and stories about people who made a lot of money from the market, it'll be one of the last warning signs. Newspaper are usually reactive, and they would not make a bold statement about the market unless the trend had been going on for a long time. This last ditch attempt to lure more sailors to the sirens would propel the market to ever greater heights, eventually capitulating and start the bear cycle.

5. When speculative counters (think ass-shares and warrants) chalk up the top volume, be careful. Usually the newbies that enter the market have little capital, so the only way they can participate in the market is to punt on penny stocks. Most of the blue chips have done its part to bring the index to new heights, so the last to run are usually the pennies. Many stocks that are rubbish will have extreme optimism attached to it, because of the belief that a greater fool will buy it from you. Be careful that you are not the last fool holding the hot potato, if you choose to play this game.

Can you think of other signs of market overheating?

*This article is contributed to IM$avvy financial portal, which is managed by Central Provident Fund Board and supported by MoneySense. This site has a noble aim of promoting financial literacy to the general population.


Anonymous said...

when the cbox is ...

I said...

Alot of IPO listings and extreme oversubscription even for the crappy ones

Anonymous said...

Hi LP,
It seems that everyone is making
money. It doesn't matter which counter. Words soon get around and the news of so easy to make money in the market soon feeds on itself until a frenzy.(like "Holland's Tulip Mania, and the "DOTCOM MANIA" in our time).i wonder is there any other "MANIA" coming in our time?
Be careful, the possibility of anyone of us getting caught in a "MANIA" is quite possible. The reason is we may not recognise it as a "MANIA" at that time; especially we may be persuaded that so many people can not be fooled or wrong at the same time.
Go and ask WB about the "DOTCOM MANIA" and you will realise how powerful a "MANIA" can be. It can suck almost everyone in to it. Me included if i lose my guard or my common sense or i become greedier than usual. Ha! Ha!

financialray said...

When the newspaper keep reporting the stock market hits new high.....
Analysts forecast the stock index to reach higher and higher within a short period of time

la papillion said...

Hi isaac,

That's actually the last point that I was trying to write but I forgot while I'm writing no.5, haha :)

Old liao...Thanks for the suggestion :)

Hi Temperament,

I think it's important to have a group of people to remind each other what to do when the time comes. But I realised the danger is also group think so everyone might end up buying at the wrong time too, haha :)

Hi financialray,

I mentioned that lah, haha :)

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