How to avoid an epic fall in the stock market
Investors have been forced to make the most of their best time in recent weeks as the market lost more than 2 per cent over the weekend and remained on course for a 10-day fall to a two-month low.
But now, the market appears to be on track for a repeat of the last time this happened.
The latest rally began last night, when the S&P 500 index soared more than 6 per cent.
Since then, however, the rally has been driven by one big problem.
It has been dominated by two different markets, and it is difficult to distinguish between them, with the Australian and New Zealand shares the dominant ones.
On Friday, the SMA closed up 0.6 per cent, while the FTSE 100 index was down 1.3 per cent on the back of concerns about the global economic outlook.
So what happened?
The key ingredient for a market crash is an overheating market.
At some point, the demand for a particular asset will exceed the supply, and a market drop is the inevitable consequence.
A market drop could also happen as the underlying asset price continues to fall.
In the case of the Australian market, this would have occurred after the FASB last month said the market could experience a correction of more than 10 per cent if growth were not strong enough to keep up with population growth.
That prompted investors to take their bets and the market has been dragged down, albeit temporarily.
Now, as the SDA is expected to rise again next week, it could be possible to return to a market decline.
There are a couple of key factors that will determine the trajectory of the market, including the SNAF.
These are the SSE and S&am indexes.
SSE has been trending higher this week, and has risen 2.9 per cent since early September.
Investors are now hoping for the SIA to move up next week as well, with investors hopeful the SICA will continue its upward trend.
After a disappointing start, the FCS has been rising steadily and is currently trading at $15.00, up almost 8 per cent from its low in August.
As a result, investors are now turning to the SIE to gauge the outlook.
Investors have been looking to the FSS to gauge its outlook, and the SFS has been trading higher than the SFA in recent months.
This is the time to take a bet that the SISA will have its best year yet and will continue to increase in value.
Despite the potential for a rally, investors need to be aware that there are risks.
First, the risks of a stock market crash can be very real.
If you are buying a stock in the SAAX, or any other stock, and suddenly it falls 10 per per cent within a matter of hours, it is very possible you will lose your investment.
Second, if you own shares in the FSL, you will not have a long-term guarantee.
Finally, investors should also consider that there is a risk of a crash.
Traders are already worried that the US Federal Reserve could lower interest rates in order to boost economic growth, and so this could have an impact on the Australian economy.
With the FED easing monetary policy, the price of oil is likely to fall, which could lead to a price crash.
It is also possible that a weaker US economy could lead investors to buy stocks in other countries.
Any major market crash will have a devastating impact on an investor’s savings and credit.