Skip to main content

Stock Market: Some signs of an impending crash

After stock market correction since Jan'08 there are many learnings for new/first time investors to protect their investment and minimize losses. How do you predict a fall in the markets? Tell-tale signs you need to look out for.

The domestic Indian markets as well as global markets are going through a long-term bull run that started in the year 2003. We have seen many phases of rallies making new highs and consolidation thereafter in this long-term bull market. This phase of the market can be attributed to several factors including globalisation that resulted in work from abroad (outsourcing) and funds, opening up of the economy, and relative isolation of the domestic markets from the slowdown in developed markets. However, this phenomenal growth in the market has made it quite volatile.

We see markets react very quickly and sharply to any news and events. Last few months were some of the most volatile months for the domestic/International markets. We have seen panic selling on the first two days of the week triggered by news of a slowdown in the global economic activities. All key market indices fell over 20 percent in just a couple of days, and then the market recovered quickly to register the biggest single day gain then slipped again to the lows.

Every investor in the market likes to invest at the bottom and exit at the top. This is difficult as it is almost impossible even for market analysts to time the market. But smart investors try to read the market signals to guess the possible direction of broader markets. These are some triggers or indicators that can point to a possible correction in the near term. Investors should be cautious on fresh investments in the market and should start booking profits when one or more of these symptoms show up.

Global News and Events

Global events have a direct or indirect impact on the domestic stock markets. Investors can keep an eye on news from global markets (sales and employment data from US markets, news/action on USA sub-prime crisis), economic events and announcements at the global level (US Federal Reserve meetings/announcements), global market movements etc to get a sense of movements of the domestic markets in the short term.

Stretched Valuation

The market valuation is the sum of individual stocks' valuations. The valuation of a stock is derived from its expected future performance. In a bull market, stocks have a tendency to surpass their true valuation. When a lot of stocks go way beyond their true valuations, the market looks over-valued and signals a correction

Liquidity

Liquidity increases the risk appetite in the market, and as a result, pushes the market up. Therefore, any signals that indicate tightening of liquidity (actions of US Fed, Japanese Central Bank, RBI actions etc) may lead to a fall in the stock markets.

Fluctuations in Commodities

Commodities are used by traders the world over for hedging. Increased activities in the commodities market (especially gold and crude) also give an indication of a possible correction in the stock markets. Also, higher crude oil prices threaten the growth of the world economy, and hence, sharp upward movements in crude oil may trigger a market fall.

Government Actions

The government is the policy maker in a country. Therefore, stability of the government, new policies or changes in the existing policies is very closely tracked by the stock market. Any bad news on this front can trigger a sell off in the market. However, the happening of one or more of these factors does not guarantee a fall in the stock markets and investors should not try to time the market. They should invest in the market with a well thought-out strategy.

These are some tried and Tested Strategies:

• Invest with a long-term horizon. It is not advisable for investors to trade in the market for short-term gains.

• Do not invest blindly in the stock markets. Analyze your investments and always maintain a profit/loss target on your investments. Book partial or full profit/loss in case your targets are triggered.

• Since the stock markets are quite volatile, keep a constant eye on your investments. If you cannot track your investments, you will be better off keeping your money in bank fixed deposits or mutual funds.

• Look for diversification of investments. Do not invest in one market instrument. Analyze your risk profile and accordingly invest in proportions into various instruments (stocks, equity and debt mutual funds, bank fixed deposits etc).

• Investors should invest their own risk money in the stock markets. This means investors should have enough liquidity in hand after investing in the stock markets. Investors should not borrow (take loan) to invest in the stock markets.

Popular posts from this blog

IDFC - Long term infrastructure bonds - Tranche 2

IDFC - Long term infrastructure bonds What are infrastructure bonds? In 2010, the government introduced a new section 80CCF under the Income Tax Act, 1961 (" Income Tax Act ") to provide for income tax deductions for subscription to long-term infrastructure bonds and pursuant to that the Central Board of Direct Taxes passed Notification No. 48/2010/F.No.149/84/2010-SO(TPL) dated July 9, 2010. These long term infrastructure bonds offer an additional window of tax deduction of investments up to Rs. 20,000 for the financial year 2010-11. This deduction is over and above the Rs 1 lakh deduction available under sections 80C, 80CCC and 80CCD read with section 80CCE of the Income Tax Act. Infrastructure bonds help in intermediating the retail investor's savings into infrastructure sector directly. Long term infrastructure Bonds by IDFC IDFC issued an earlier tranche of these long term infrastructure bonds on November 12, 2010. This is the second public issue of long-te...

Am you Required to E-file Tax Return?

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Am I Required to 'E-file' My Return? Yes, under the law you are required to e-file your return if your income for the year is Rs. 500,000 or more. Even if you are not required to e-file your return, it is advisable to do so for the following benefits: i) E-filing is environment friendly. ii) E-filing ensures certain validations before the return is filed. Therefore, e-returns are more accurate than the paper returns. iii) E-returns are processed faster than the paper returns. iv) E-filing can be done from the comfort of home/office and you do not have to stand in queue to e-file. v) E-returns can be accessed anytime from the tax department's e-filing portal. For further information contact Prajna Capit...

Section 80CCD

Top SIP Funds Online   Income tax deduction under section 80CCD Under Income Tax, TaxPayers have the benefit of claiming several deductions. Out of the deduction avenues, Section 80CCD provides t axpayer deductions against investments made in specific sector s. Under Section 80CCD, an assessee is eligible to claim deductions against the contributions made to the National Pension Scheme or Atal Pension Yojana. Contributions made by an employer to National Pension Scheme are also eligible for deductions under the provisions of Section 80 CCD. In this article, we will take a look at the primary features of this section, the terms and conditions for claiming deductions, the eligibility to claim such deductions, and some of the commonly asked questions in this regard. There are two parts of Section 80CCD. Subsection 1 of this section refers to tax deductions for all assesses who are central government or state government employees, or self-employed or employed by any other employers. In...

ULIP Review: ProGrowth Super II

  If you are interested in a death cover that's just big enough, HDFC SL ProGrowth Super II is something worth a try. The beauty is it has something for everybody — you name the risk profile, the category is right up there. But do a SWOT analysis of the basket, and the gloss fades     HDFC SL ProGrowth Super II is a type-II unit-linked insurance plan ( ULIP ). Launched in September 2010, this is a small ticket-size scheme with multiple rider options and adequate death cover. It offers five investment options (funds) — one in each category of large-cap equity, mid-cap equity, balanced, debt and money market fund. COST STRUCTURE: ProGrowth Super II is reasonably priced, with the premium allocation charge lower than most others in the category. However, the scheme's mortality charge is almost 60% that of LIC mortality table for those investing early in life. This charge reduces with age. BENEFITS: Investors can choose a sum assured between 10-40 times the annualised premium...

Merger of Tata Indo-Global Infrastructure Fund with Tata Equity Opportunities Fund

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300 Merger of Tata Indo-Global Infrastructure Fund with Tata Equity Opportunities Fund Tata Mutual Fund has decided to merge Tata Indo-Global Infrastructure Fund with Tata Equity Opportunities Fund, with effect from January 16, 2015.   Investors of Tata Indo-Global Infrastructure Fund can redeem/ switch out units from December 13, 2014 to January 12, 2015 without paying any exit load. For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call Leave a missed Call on 94 8300 8300 Leave your comment with mail ID and we will answer them OR You can write back to us at PrajnaCapital [at] Gmail [dot] Com --------------------------------------------- Invest Mutual Funds Online Invest Any Mutual Fund Online Download Mutual Fund Application Forms from all AMCs Download Mutual Any Fund A...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now