Saturday, January 09, 2016

Scenario of Stock Market Euphoria

Scenario of Stock Market Euphoria

Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria / Sir John Templeton

The last stage of a bull market is euphoric. It is important to know the scenario of such a market so as not to be deluded by the madness of the crowd.

In an euphoric market, optimism is at its extreme. Price-rise is an expectation. Newbies come in drove to open accounts with broker firms. More and more housewives get involved. Shoe-shine boys, ice-creme sellers and poor farmers will also be talking about the market. By then the market is a hive of activity.

The public flocks to the boardroom every trading day. Financial news is good. Price advances are spectacular and frequently made head lines in local newspapers. The dogs and cats (low-price stocks of no investment value) are whirled up, but big blues refuse to rise further. Volume continues to rise and speculation is on the rampage. In every corner of the town people are talking and boasting of their gains in the stock market. 

Stocks will be trading and very high PE and low-dividend yield. Every tip you get is a good tip; everyone is an expert as prices continue to move up day after day. 

Boardrooms in broker firms are crowded as soon as the market opens. All seats available will be fully occupied; people will be standing here and there.

IPOs (initial public offerings) become more often, and most are oversubscribed by close to a hundred times. 

The craziest thing is that warrants can be higher than the mother shares. People simply throw cautious to the wind, become illogical and mad! Then you hear someone says, “this time is different). 

The truth is that, like all bull markets, this too will pass. It will not be unlike any other bull markets. If you are lucky to see such a scenario, be wise enough to sell everything, and sell short if you are allowed. Remember what the great investor Warren Buffet said, “Be fearful when others are greedy.” 

Euphoria has no time limit. It can lasts for months, weeks or even days. You must get out in time. For when the market finally reverses, the way down will be fast, furious and cruel. The majority will be hurt; they will be devastated. Don’t be one of them.

Are we anywhere near a market on euphoria? 

Fundamentally sound stocks giving 4 to 5% dividend yield are still available presently, and volume transacted daily is normal, 1 billion plus. I think we are far from there. When volume transacted daily is over a few billion units, its time to worry.

Notwithstanding the truth and opinion expressed above, stock markets are always uncertain. 

You listen to me at your own risk.

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