The next sharemarket crash is coming. Here's what to do about it
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The next sharemarket crash is coming. Here's what to do about it

The US S&P 500 index has just recorded what is being described as the longest bull market in modern history and the index is now higher than the record in February, from which we saw an 11.8 per cent sell-off in 10 days. The US market is very close to being technically “overbought” once again, a rare occurrence for such a large index and it is now also trading at the top of its six-month trading range if not busting out to the upside.

When the sharemarket is at high altitude, it needs less of a reason to fall.

When the sharemarket is at high altitude, it needs less of a reason to fall.Credit:Greg Newington

Scanning the newswires it is also clear that one of the early indicators of a market top, the number of articles talking about a market top, is also on the rise. From one day on Livewire this week came the headlines “How to catch the top”, “Ageing bull market approaches seasonally weak September” and “When to hold and when to fold”.

As the market rises it is a natural human investor assumption that what goes up must come down, otherwise known as mean reversion, a financial theory suggesting that asset prices that spike or dive eventually return to the long run average. On which basis we are now watching the current equity market blow off and wondering when the sell-off is going to come.

But selling because something has gone up is the most amateur of mindsets and typical of human wiring that is not naturally engineered for investment.

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As any technical aficionado will tell you, you buy things that are going up and only sell them when they go down. On that basis my humble advice remains the same as always – don’t bother trying to predict the top of the market, wait for it. The trick to that is twofold:

1. Be vigilant

A classic weakness of the average investor is complacency. Believing everything is normal when in fact it is exceptional. The US market is up 58 per cent in two and a half years. This is not normal, it is great. So do not take it for granted. The higher it goes the more vigilant you need to become, not the more relaxed.

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The air gets thinner at altitude. When a sell-off comes it will happen more quickly and more sharply than it will at low altitude. And the higher the market goes, the less of an excuse it will take to knock it off its perch. So keep watching, more so at higher levels. Even though it’s not allowed, keep that mobile phone in your golf bag just in case it all goes oblong halfway through the round.

2. Be prepared to act when it happens

Another costly investor weakness is inaction. Watching markets fall, or a stock fall, and not doing anything about it is second-rate. The sharemarket is not a weighing machine (all those Buffett-quoting puritanical value investors tell you it is, but that’s in order to excuse themselves from having to time the market), it is a voting machine.

Sentiment is a huge and enduring factor. It can swamp value for long periods. You have to gauge it just as you do value. Value is easy, its numbers. Sentiment is hard, it is ethereal. But that doesn’t mean you can’t respect it as many don’t. You are not buying a company when you buy a stock you are buying into a share price journey which includes sentiment as well is value factors and you cannot operate on value alone. You might as well put blinkers on if you think value is all you need to focus on.

You don’t have to believe me, hopefully a lot of investors don’t, but investors and advisers who are realistic about the sharemarket need to react to changes in trend not sit there quoting people far smarter, richer and patient than ourselves in an attempt to get away with doing nothing when we should be doing something.

Selling because something has gone up is the most amateur of mindsets.

You can afford to ride the parabolic moments in the market just so long as you have the clarity of mind to change your mind when it looks like ending.

At the moment equity markets appear to be in the early stages of going parabolic. That can last for days or years, but we all saw in February how quickly parabolic momentum can turn into precipitous collapse.

Don’t predict the top but do keep watch, assume nothing, expect anything and above all, make sure you do something when the time comes. Denial is a very expensive luxury that only the very wealthy can afford and the deluded will endure.

Marcus Padley is the author of the daily sharemarket newsletter Marcus Today. For a free trial of the Marcus Today newsletter, please go to marcustoday.com.au

Marcus Padley is the author of the daily stock market newsletter Marcus Today.

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