Stocks and Shares for Beginners - Stock Market Boom and Crash All Over Again?
Groundhog Day on the Stock Markets ? - Take Care
In recent posts, see - Stock Market to Crash Next Month ? and Stock Market Crash Coming Soon ? - I have mentioned the fact that a number of people have commented that they see a very strong possibility of another stock market crash very soon i.e. now or next month. One of the reasons (apart from the 50% rise since March) is that, incredible as it may seem, the so-called 'dumb money' is now invested in the stock market again. Beginners to stock market investing would do well to take heed. They would also do well to learn how to read stock market charts. For example if a share price falls below its 200 day moving average then that is not the time to be buying. At the moment that is unlikely to be the case as everything is going up, but if the stock market starts to fall back then if it falls below its 200 day moving average that is a bad sign. If you don't know what that means then have a look here - how to read stock charts for beginners
The following chart shows the FTSE 100 over 5 years with the 200 day moving average in red. Note that during 2005, 2006, and 2007 the FTSE stayed above the 200 day moving average - at the end of 2007 it fell below the 200 day moving average and slumped down to around 3500 - since May/June 2009 it has been above the 200 day M.A.
FTSE 100 3 month chart with 200 day M.A. in red
I was initially a bit sceptical of the assertion that the 'dumb money' was back in the markets, but it appears that it is true, ordinary folk have got fed up of low interest rates on their savings and they are also disillusioned with property prices and so have piled back in to the stock market ! No doubt inspired by the fact that some banks have risen 400% since March. Now is that smart I wonder ?
When did they start flocking back to the casino ? In June.
Since June the numbers of small investors taking an uneducated punt on the stock market has risen to levels not seen since the dotcom boom (remember that?) ! Incroyable but true apparently. The reason this is important is because it is generally when the dumb money is back in the money that the 'smart money' starts getting out i.e. the smart investors will start selling their stock (slowly at first) to the dumb investors. Thus the dumb investors pay top dollar for stock that the smart investors bought 6 months ago when it was cheap. When the smart investors are back in cash then the stock market can crash again as the smart investors won't be losing any money.
In the last year the number of ‘active’ traders using execution only dealers has tripled.
James Brown from Compeer, who compiled the data, told the FT. "Share trading has gone through the roof and volumes are still on the way up."
Many experts, however, fear an autumn ‘correction’. Although others say the return of the small investor represents an upturn in confidence. What is more interesting is that trading in bank shares has dominated.
Sue Concannon, from Halifax Share Dealing, expects the brokerage part to proces 125% more trades than last year.
Personally, I am very wary of what is happening. If you got in back in March or if you are sitting on large gains than I would be thinking of selling up and getting into cash, at the very least I would have stop losses set to minimize losses. The people talking about a crash are not talking about a correction of around 10%, they are talking about major crashes and draw parallels to what happened back in 1929 when the stock market first crashed, then recovered 48%, then crashed again but even more so ! The worst figure I have seen mentioned is around 1650 on the DOW i.e. 90% down from where we are now.
So if you are a wily old investor then you may just shrug your shoulders, but for stock market beginners I would say that this is not the time to be taking everything you hear on TV at face value. Rampers, bankers and experts are not there to make money for you they are there to make money from you.
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