Why stock market crashed in 2020?

Why the stock market crashed in 2020?

The stock market works on different cycles these are accumulation phase, markup phase, distribution phase, markdown phase to understand more click here. Whenever the market moves up we never think the market will more down and when the stock market moves down we never think it will move up. This is the biggest mistake of retail investors.

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1. The first early sign of a stock market crash is an increase in speculation activity in stocks and indexes.

Whenever there is heavy buying in futures - options derivatives, Only buying Index stocks which creates a bubble and the valuation of these stock are not justified with their earning.

2. The second sign of the stock market crash is a slowdown in the economy. 

Economy and stock market performance are directly prepositional. If country GDP growth is slow and unemployment is increasing, inflation is increasing it indicates the macroeconomy of the country which directly affects the stock market. Whenever there is a divergence in growth and stock market performance it will lead to the crash in the future.

3. The third sign of the stock market crash is discounting all bad news and events.

The natural behavior of the stock market is it move up when there is good news and move down when there is bad news but if the stock market doesn't behave normally it is an early sign of a stock market crash.

4. The fourth sign of the stock market crash is the Valuation of the stock is at an all-time high. 

If stock or Index trades higher than a then historical multiple of EBITA  then it leads to correction on stock and index. Big investors never invest at higher valuations this is very important parameters that are never discussed. Whenever there is a divergence between  EBITA and stock price it leads to correction.

5. The fifth sign of a stock market crash is bad news in the banking sectors. 

The banking sector is the backbone of the economy and there is a problem in banking sectors it will reflect in the stock market eg. Lehman brother.

6. The sixth sign of a stock market crash is a decrease in interest rates.

 Low-interest rates create a high liquidity situation which generates a demand bubble in the system which leads to a higher valuation of the stock market it burst someday. If there is a divergence in bond yield and interest rates it creates a stock market crash situation.

7. The seventh sign of a stock market crash is the increase in the gold price.

There is an inverse relationship between the gold price and the stock market. If gold price increases, it can lead to a stock market correction. It is the early sign so keep a watch on the gold price. If gold returns are higher then stock market returns it means big investors are buying gold and selling stocks.

If there is any correction on the stock market every time it finds new reasons so stay alert and keep monitoring these parameters.