Stock Market Crashing?
Below are 5 popular indicators that could help answer this. Usually stock market crashes when stock prices are very high or are highly overvalued compared to the growth of the economy. One of the 5 indicators below i.e. Inverted Yield Curve has successfully predicted 7 past economic recession!
1) Buffett Indicator
Link: https://www.gurufocus.com/stock-market-valuations.php or click here
An indicator from Warren Buffett himself. Buffet Indicator uses 'Total Market Capital' of the U.S. stock market divide by 'Gross Domestic Product' GDP of the U.S. economy to determine whether the stock market is overvalued compared to the economy. Below is a screenshot taken which indicates stock market is 'Significantly Overvalued' as at June 2023. The lowest point in the screenshot was due to the year 2008 Global Financial Crisis, stock prices were high before it crashed.
2) Shiller PE Ratio
Link: https://www.multpl.com/shiller-pe or click here
The ratio was invented by American economist Robert J. Shiller. A high PE ratio on S&P 500 could be an indicator prior to market crashes. Below is a screenshot taken as at June 2023 where it has accurately predicted several market crashes e.g. The highest peak was during Year 2000 dot-com bubble burst and next peak was during Year 2019 Covid-19 crash. The other 2 crashes indicated were Year 1929 Black Tuesday or Great Depression and Year 1987 Black Monday.
3) Inverted Yield Curve
Link: https://www.gurufocus.com/yield_curve.php or click here
Link to U.S.10 Year Treasury: https://www.cnbc.com/quotes/US10Y or click here
An inverted yield curve happens when 10 Year Treasury yield % is lower than 1 Year Treasury yield %. Imagine yourself buying a 10 year bond with % return lower than a 1 year bond! Below is a screenshot taken as at June 2023 showing an inverted yield curve has predicted the past 7 recessions when <0% shown via red line . i.e. 1969 Mild Recession, 1973 Oil Crisis, 1980 Recession, 1981-1982 Recession, Early 1990 Recession, 2000 Dot com Bubble, 2008 Global Financial Crisis.
4) Fear & Greed Index
Link: https://edition.cnn.com/markets/fear-and-greed or click here
Warren Buffett famously said "be fearful when others are greedy!". Stock prices are high because everyone is greedily buying up prices. One indicator of "Greed" can be the number of stock prices hitting 52-week highs exceeds the number of stock prices hitting 52-week lows. Below screenshot indicates that overall stock market is 'Greed' as at 02 June 2023.
5) VIX
Link: https://www.cboe.com/tradable_products/vix/vix_options or click here
Another indicator for investor greed and fear, VIX Indicator is a measure of the stock market's expectation of volatility based on S&P 500 index option prices. Usually, a higher VIX number i.e. >30 shows that investors are fearful as they are uncertain on stock market, while a lower number <15 shows that investors are more certain or greedy, sometimes even complacent. Usually when stock prices in S&P 500 crashes, VIX number will increase indicating "fear". Below screenshot taken as at 02 June 2023 shows VIX number below 0 at the end of the graph indicating investors are "greedy".
