How can some people be able to predict the bubble or upcoming crash in stock market? What kind of data do they use?

Discussion on bubbles/crashes

FINANCE

Lillaney, RTI For Money

5/13/20231 min read

https://rtiformoney.in/how-can-some-people-be-able-to-predict-the-bubble-or-upcoming-crash-in-stock-market-what-kind-of-data-
https://rtiformoney.in/how-can-some-people-be-able-to-predict-the-bubble-or-upcoming-crash-in-stock-market-what-kind-of-data-

Predicting a bubble or upcoming crash is possible if you are experienced enough and have seen a few bubbles in the past. Some of the signs of a bubble are as follows:

1. Too much liquidity in the markets due to various factors like central banks cutting rates for an extended period, injecting liquidity, buying assets/securities.

2. Lots of new IPOs of companies of lower grade who have never made a profit and have no cash flows.

3. Lots of new investors/traders joining the markets and making absurd amounts of money when compared to experienced investors/traders.

4. High P/E, P/B, other overvaluation metrics with supporting stories that this time its different :)

5. Almost no/low thoughts given to risk.

You could see the above in the recent bubble related to crypto currencies, tech related bubble after covid, etc. It has happened multiple times in the past as well in 2000 with the dotcom mania and 2007/8 with the real estate bubble which are just recent examples.

Although the signs are clear it is very difficult to know when the bubble will burst as happened recently in the US market with the Fed raising rates since March 2021, but the bubble popped later when the effects of the hikes started to bite the economy and caused risky banks to fail which happened in 2008 as well.

Some of the best books that I have read on people who have profited from bubbles or crashes are as given below:

  1. The Big Short by Michael Lewis - https://amzn.to/3IaXu60

  2. The Greatest Trade Ever - https://amzn.to/42zJE5l

What can investors do to protect themselves in a crash?

There are a couple of options.

  1. Sell everything and move to cash.

  2. Sell everything and move to bonds/deposits.

  3. Sell everything and buy gold.

  4. Buy puts which increase in value when your corresponding underlying falls.

  5. Sell calls which decrease in value when your corresponding underlying falls.


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