How to Know When Stock Markets Are Crashing

“One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute” ― William Feather

3 min read

How to Know When Stock Markets Are Crashing

“One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute” ― William Feather

3 min read

Stock markets are dynamic entities that can experience rapid fluctuations. Understanding when a market is crashing is crucial for investors looking to protect their portfolios and make informed decisions. There is no way of knowing for certain, and anyone who tells you they “know” is likely making it up, but with the indicators we will discuss in this article, you will hopefully be able to recognise when a stock market crash might be imminent.

1. Abnormal Trading Volume

One of the first signs of an impending market crash is a significant increase in trading volume. When trading volume surges, it can indicate that many investors are frantically buying or selling shares. An unusual volume spike may signify panic or irrational behavior, which could trigger a market downturn.

2. Declining Stock Prices

Whilst it might seem obvious, declining stock prices overall are a clear indication of a market under distress. If you observe a broad decline in share values across multiple sectors, it’s an alarming sign that the market might be crashing. Pay attention to stock indices and market benchmarks like the S&P 500, FTSE100, ASX etc. which can provide insights into the overall health of the market.

3. Economic Indicators

Keep an eye on economic indicators such as the Gross Domestic Product (GDP), unemployment rates, and consumer confidence. A consistent decline in these indicators can foreshadow a recession or economic downturn, which often leads to a market crash.

4. Volatility Index (VIX)

The Volatility Index, often referred to as the VIX or the “fear gauge,” measures market volatility. A significant spike in the VIX indicates growing uncertainty and fear in the market. Investors commonly use the VIX to gauge market sentiment.

5. Bond Market Signals

The bond market can provide valuable clues about the stock market’s future. An inverted yield curve, where short-term interest rates exceed long-term rates, has historically preceded market crashes. Bond prices also tend to rise when investors seek safety, signaling potential trouble in the stock market.

6. News and Headlines

Pay attention to financial news and headlines. Negative news stories, geopolitical tensions, or global events can trigger panic among investors and lead to market sell-offs. Frequent market news updates can help you stay informed and make timely decisions.

7. Institutional Investors' Actions

Monitor the actions of institutional investors like mutual funds, hedge funds, and pension funds. Large-scale selling by these entities can be a sign of uncertainty and can further exacerbate a market crash.

8. Stock Valuations

Examine price-to-earnings (P/E) ratios and other valuation metrics for individual stocks and the overall market. Extremely high valuations could indicate an overbought market, making it vulnerable to a correction or crash.

9. Technical Analysis

Technical indicators such as moving averages, relative strength, and momentum can help identify trends and possible market reversals. Learning to interpret these signals can be an essential skill for investors.

10. History as a Guide

Review past market crashes, like the Great Recession of 2008 or the Dot-Com Bubble burst in 2000. Historical patterns and parallels can offer valuable insights into the early warning signs and stages of a market crash.

11. Risk Management Strategies

In addition to identifying signs of a market crash, having a risk management strategy is essential. Diversifying your portfolio, setting stop-loss orders, and establishing an emergency fund can help mitigate potential losses during market downturns.

12. Seek Professional Advice

If you’re uncertain or anxious about market conditions, consider consulting a Financial Adviser or other professional. Their expertise can guide you through volatile periods and help you make sound investment decisions.

Preparation is Key

Whilst predicting a stock market crash with certainty is challenging, by which we mean impossible until it is too late, recognising the warning signs and staying informed is crucial. Developing a steadfast investment strategy and maintaining a long-term perspective can help you weather market turbulence and secure your financial future. Remember that markets have historically rebounded after crashes, highlighting the importance of staying calm and resilient during challenging times.

In a world of financial uncertainties, knowledge and preparation are your most potent tools.

If you’re not sure whether your investments are prepared for any future uncertainty that may (or may not!) arrive, , get in touch with Patterson Mills today and book your initial, no-cost and no-obligation meeting to ensure you can survive any storms on the horizon. Send us an e-mail to info@pattersonmills.ch or call us direct at +41 21 801 36 84 and we shall be pleased to assist you.

Please note that all information within this article has been prepared for informational purposes only. This article does not constitute financial, legal or tax advice. Always ensure you speak to a regulated Financial Adviser before making any financial decisions.