You have put lakhs of rupees in the share market and imagine that the market crashes and every day the market is touching the lower circuit limit, in such a situation you get very surprised, you also get sleepless. But now just imagine how good it would be for you if you understood before the market crash and secured your capital.
Hello readers, I am Mukul Agarwal (Investor, trading coach, and founder of Agrawal Corporate) and in this guide, I am going to share my 5 signs of the market crash, so that you can save yourself from any mishap in the market. If these signs initiate arising in the call then you are required to be cognizant.
Excession Valuation
If the market increases beyond a certain point, the market is considered overvalued, which is also called Excession Valuation. To understand this, one has to understand the PE ratio of the indices.
Let us comprehend it with an illustration –
You must be aware of the Nifty 50 Price to Earnings (PE) Ratio, it shows the price to earnings ratio of investors in 50 companies. With the help of this, it will be easy for you to understand the real value of the Stock market. The ideal PE Ratio of Nifty 50 is between 19-20 i.e. the market is in a stable state in this condition. Now on this basis, you will be able to understand whether you have to buy shares or book your profit?
If we look at the PE Ratio of Nifty in current, it is 25+, whereas ideally it should be between 15-20, i.e. we can assert that the market is overrated.
In 2008, the PE ratio of Nifty became 28+, then you all would know that Nifty had fallen by 60% in 9 months. This has arisen multiple times in history.
The Buffett Indicator
The Buffett indicator was proposed by investing guru “Sir Warren Buffet” in 2001. With the help of this scale, it can be estimated that the stock market as a whole is undervalued or overvalued. This indicator is used in the markets of many countries, it is common. The Buffett indicator distinguishes the gross value of the Indian stock market from India’s gross domestic product or GDP.
As a rule, the market is in the best condition when the indicator is between 75-90 %, 90% above, and 115% when the indicator is between 115%, and the market is considered to be very marginally overvalued. And if the indicator is 115% then the market is overvalued and ready for a big drop.
Excessively High Market Sentiment
The sentiment is responsible for the volatility in the stock market. When some bad news spreads, the rate gets hit, which increases the sellers of the stock, as the investors start saving their capital. When positive news spreads, the number of buyers in the market increases, and the market starts trending continuously.
Sometimes the market keeps going up and down due to the news for a long time, in such conditions investors do not consider the fundamental market analysis and take decisions emotionally based on the news
When the market gets excited due to the positive news, the stock prices start going up very fast, then it is a sign that a market crash is imminent. The best measure to measure this is the Fear and Greed Index. This scale has been created by CNN Money, using this you will be able to understand how much emotion is responsible for the turmoil in the market.
Domestic and Geopolitical Uncertainty
History is witness that politics has always affected the stock market. Changes also occur in the economy due to legislative changes, politics has the potential to destroy the market. You need to be alert when there is uncertainty in politics.
Because when the stable investors do not understand the situation, they do not like to put the capital at risk, and as soon as the interest of the investors decreases in the market, the market prices are sure to fall.
Due to politics, many ups and downs can be seen in the market in the future. Many big political analysts argue that geopolitics will increase in the coming few years because many countries are engaged in expanding their borders, and those countries are dirty. Internal political problems are increasing.
A Bolt from the Blue
In A bolt from the blue, it is completely different from the other signals mentioned above. When a sudden event happens which we have not even imagined, then the market falls in proportion to the time of that event, there have been many such incidents in the history of the stock market.
COVID-19 – The most recent A bolt from the blue 2020 key occurred in March. COVID-19 not only harmed the living conditions of the people but also caused a tremendous drop in the stock market.
Terrorist attacks – India suffered a lot due to terrorist attacks in 1993 and 2008. The whole country was in a panic, the foreign investors started running very fast resulting in a significant fall in the market.
Apart from this, many such unexpected incidents have happened in the past which have triggered the market crash.
