Stock market around the globe has been rallying ever since the beginning of the year, with many stocks become overvalued (to some analysts) and ran out of fundamental. Have you ever wondered if this recovery is in for real and permanent? There are many reasons to why the stock market will crash as it nearing end of the year (Between October and December), below are the 6 most major reasons. US being the largest economy in the world, the health of their financial system is vital to the recovery of global economy, thus most of the reasons also originated from US!
Reason #1 – Consumer is still down – The drive of the US economy is the consumer spending which accounts largely for the nation’s GDP, and the consumer is down and out. American has lost almost half of their wealth in the past 2 years; more than $4 trillion in credit lines will have vanished by year end. The real unemployment rate is roughly 20% and weekly work hours and wages are stagnant. In short, most consumers still have no extra income to spend.
Reason #2 – W-shape recession/recovery? – Without consumer spending picking up drastically, the economy will likely to face a W-shape recession/recovery (not a V-shaped one). We are currently climbing the second leg of W (almost complete drawing a V shape) due to rising expectations about the economy, however the economy fundamental is not improving much. Media and government agency played a major role in painting a nicer than realistic picture on our economic outlook, is it only a hype or fact?
Reason #3 – Drag down by Bank Forecast – The banks have been leading the roller coaster ride for the fall and rise since last year October and March. Any negative comments or forecast of 2010 would easily send the market into another nose dive. And don’t forget banks in America still bear billions of toxic assets/mortgage.
Reason #4 – Stock Overvalued against Lower Earning – Stock has been rallying out of fundamental since the beginning of the year. Some says the stock has becoming so expensive that it is ridiculous consider economy is still fragile and breakable. Therefore, any lower than expected earning reports in coming months will translate to stock price being overvalued, thus will send the stock price south or a major correction.
Reason #5 – Light buying volume/light buying interest – Comparing to the historical bull market pattern, the recent buying volume is consider very light. This is the indication that many large investors, institutional investors or funds are still not buying in the stock for long term. Not buying interest from large institution like mutual funds means no strong bottom line support and no further upside to a long term bull market. Because of no strong bottom line support, any negative news could send many small investors running for shelter thus sending the stock price into a nose dive.
Reason #6 – History repeats? There is deadly similarity between the chart of the rally began March 09 and that of 1937 – 1938 (The W-shaped recession during last depression) - which followed by a sharp pull-back. Could the history repeat itself once again?
There are more reasons for the stock market to crash in coming month than merely the 6 reasons covered above. I find these reasons more relevant to the situation I see in the recent stock market. The other reasons are more to the result of technical analysis. If you find the stock market crash reasons to make sense, what will you do if…
You are holding some stock, be it in Bursa KL or NY Stock Exchange?
Will you wait and see…
Or
Sell as early as possible, so to avoid selling at a ridiculously low price and make huge loss. A better alternative is to protect your stock price by buying a put option. Read my option trading article here.
For those of you who thought you missed the early bus in March 09, this could be another chance for you to buy into the stock at a discounted price.