Can Crashes be Forecasted?

臥龍先生

股市到了這個階段, 我想是時候留意什麼時候股市會崩盤了. 但是它真的可以被預測嗎 ?

Can Crashes be Forecasted?

One of the greatest myths of all time is that market crashes are random, unpredictable events. The lead up to a market crash is often years in the making. Certain warning signs exist, which characterize the end of a bull market and the start of a bear market. By learning these common warning signs, you can liquidate your investments and prosper by shorting the market.

The stock market is a study in human psychology as it is human emotion that drives all market action. A healthy human mindset is cautious and skeptical, but also realistically optimistic. Throughout the early stages of a bull market, investors tend to be cautious and skeptical, as well. This caution always signifies the health of a bull market.

Nearing the end of a bull market, the market psychology becomes manic, or excessively euphoric. Being manic is a form of mental illness in humans, as well. This is characterized by euphoria that isn’t rational. For example, a manic person may feel so wonderful that they may not sleep for days or give away their life savings. Later on, the mentally ill person is no longer manic, they are depressed. The stock market follows same exact manic-depressive pattern. This realization of the market being manic-depressive was by the brilliant Benjamin Graham. Benjamin Graham was the mentor of the greatest investor of all time and second richest man in the world, Warren Buffett.

At the top of a bull market, words can’t describe how euphoric investors are. It is very common for investors of very modest means to now have portfolios valued in the hundreds of thousands of dollars. In the Dot Com Bubble, many secretaries had multimillion dollar stock option portfolios! This type of instant wealth isn’t reality, unfortunately. It is one of the prime characteristics of a coming stock market crash. In every stock bubble, people of average means become fantastically wealthy, all while barely trying.

Another major sign of a coming stock market crash is overly euphoric news media. The news media has an extremely poor track record at forecasting markets. Their record is so horrible, that doing the direct opposite is highly profitable! If financial newspapers have headlines that are exalting the recent stock market performance, SELL- as fast as you can!

The most deadly phrase in the market is “this time is different”! Another costly adage is “we are in a New Economy”! Both these phrases and their variations have been around since the dawn of markets. The markets never change, because human psychology never changes. When phrases like these are used, it’s because the user is in denial of reality. In these cases, it is the “dumb money” investors who want to keep riding the bull market in the same lazy fashion. The professional “smart money” realize that bull markets are always temporary. The smart money will profit in both a bull market and a stock market crash.

At the precipice of financial disaster, inflation becomes rampant. Inflation is the rising cost of living, which decreases the buying power of a dollar. The rising cost of living can be observed by much higher gasoline prices, housing prices and food prices. Ironically, it is the strong economy that causes inflation. In simple terms, the strong economy causes more demand for goods and transportation. When salaries go up, people take more vacations, which require gasoline, etc. Small inflation is a good sign, but when it really heats up, look out below!

Once high inflation sets in, the Federal Reserve tries to cool down the economy. The Fed tries to engineer a “soft landing” by raising interest rates. If inflation and stock speculation is out of hand, rates will have to climb fairly high to have an effect. Pretty soon, the stock market crashes as speculators head for the exits. The overvalued stocks quickly become a fraction of their previous values. The market will often crash for several years to come.

Stock market crashes are not difficult to forecast, as they all have the same tell-tale signs. If you are astute enough to recognize these signs, prospering from a crash is a realistic proposition.

臥龍先生

What Exactly is a Market Crash?

“Market crash”. Just thesound of the phrase makes most people shudder. But what exactly is acrash, and why do they occur? The answer lies within human psychology.

People love bull markets. Bull markets have the uncanny ability tochange the collective attitude of society. In a quickly rising market,even the words of rather prosaic business pundits become a form ofentertainment. This is what happened in the tech boom as Fed Chairman,Alan Greenspan, became a worshipped celebrity. Eventually the euphoriachanges into downright pessimism as the inevitable market crash occurs.Later on, the cycle repeats itself. In order to fully understand theseevents, we must learn about behavioral finance.

In financial markets, the “majority is always wrong.” When theinvesting majority or the crowd is overly bearish, this is the besttime to be buying stocks. When the crowd is overly exuberant, this isthe time to be selling stocks. The financial markets work in thisironic way because not everyone can win in the market. If it werepossible for everyone to win in the markets, this would mean that moneyis being created from nothing. The creation of money, in this manner,is impossible. Therefore the markets are a zero-sum game. Zero-summeans that for every winner, there is a loser. The winner takes thelosers money. Zero-sum games are games where the amount of "winnablegoods" is fixed.

The Start of a Bull Market

The bottom of the market starts at a time when the stock market is weakand the general population is pessimistic. At this point most investorssell after having endured a long and torturous bear market. Thisextreme pessimism found at a bottom is always irrational andundeserved. Now the market is undervalued and is a bargain. Savvyinvestors, the “smart money”, buy bargain stocks knowing that they willbe able to sell them higher in the near future. Smart money buying,called accumulation, causes stocks to rise. The smart money oftenconsists of NYSE specialists, Nasdaq Market Makers, hedge fund tradersand corporate insiders. These traders have access to information thatthe general public does not.

Rising stocks eventually gain the respect of mutual funds, as billionsof dollars of capital is introduced into the market place. Mutual fundinvestment causes the stock market to advance in a powerful manner.Much of the steady large trends are powered by mutual funds and otherinstitutional investors. After the stock market has gained, stocks arenow fairly valued and are no longer considered bargains. The smartmoney is now sitting on a large profit, as well. The average investoris still skeptical, however.

As bull market events unfold, retail investors begin to take interestin stocks. Retail investors, or the unsophisticated little guy, make upthe vast majority of investors. This group does not invest for aliving. Retail investors often make investment decisions based on whatthey read in financial magazines, from their brokers and from tips fromfriends. As the flood of retail capital is invested, the market soars,causing great euphoria. At this point in the cycle, many companiesbecome public, or launch an IPO. Companies go public when investorsentiment is most optimistic so as to gain the highest possible stockprice. IPO’s generate even more optimism as unsophisticated investorsbuy into the fallacious thoughts of instant riches. Now is the timewhen many small investors become wealthy. In this phase, stocks aredoubling and tripling as the media cheers on the advancing bull market.

At this point, the smart money sells, or distributes, the nowovervalued stocks to overconfident retail investors. The smart moneyknows that overvalued stocks are no longer worthy investments, and willsoon drop in value. Widespread greed always occurs, in some form, atstock market tops. Sometimes this greed takes form as accounting fraudwhere companies over inflate their values. Other times companies makeunrealistic promises, such as dot com stocks without any earnings.These immoral activities can take place because irrational retailinvestors will buy a stock simply because it is glamorous. To compoundthe problems, investors will now start to use margin, or leverage, tofurther accelerate gains. All caution is thrown to the wind asinvestors think “the old rules don’t apply”.

The Start of a Bear Market

After mutual funds and retail investors are fully invested, the marketis overbought. This means that there is no more cash to fuel the rally.The market can only go in one direction: down. All it takes is just ahint of negative news and the market collapses under its own weight.Investors quickly realize the market is made of smoke and mirrors, asfrauds or other abuses come to light.

When panic selling starts, a market will always fall quicker than ithad risen. Oftentimes, as everyone heads for the exit at the same time,there isn’t anyone willing to buy the stock. This can be especiallydisastrous for margin users as they grow deeply indebted to theirbrokers. Bankruptcy is the usual result for these foolish gamblers. Themajority of retail investors don’t sell even as the market isplummeting. This crowd keeps holding on to stocks in hopes that themarket will recover. As the market plummets 25%, then 50% the averageretail investor foolishly holds on, in complete denial that the bullmarket is over. Finally retail investors sell every stock they ownplummeting the market even further. This mass exodus is calledcapitulation.

The Cycle Starts Again

It is at this point that stocks are undervalued once again. The smartmoney is accumulating and stocks rise. The majority of retail investorsbought at the top and sold at the very bottom. This is the very essenceof the “dumb money”. They are perpetually late into the game. Thiscycle continues over and over. Only the smart money actually “buys lowand sells high”. After trading in this manner, the dumb money willadhere to adages such as, “the stock market is risky”. In reality,however, the stock market is only risky if you trade like the mindlessmajority!

arnofren

这个情景已经出现了！