How to Spot a Stock Market Decline Early

Most everyone has some money invested in the stock market, whether through owning individual stock, a 401k retirement fund or another vehicle. Spotting a market decline early is invaluable in managing these invested funds. While not foolproof, there are historical indicators that any should investor should be aware of to hedge their stock market losses.

Instructions

1. Compare stocks to bonds. These are the two major investment vehicles used by professional money managers. If stocks are gaining significantly more than bonds this is an indication of stocks being overvalued. Money managers will tend to shift investment focus to bonds, thereby causing a sell-off in stocks in the long-term.

2. Monitor the amount of cash held by mutual funds. As the cash levels decline for mutual funds, stability decreases. For example, if shareholders sell their shares, the mutual fund managers must pay these redemptions out of cash on hand and if that level is low they will be forced to sell large blocks of stocks to satisfy the debt. These circumstances make the market prime for a downturn based on the sell-off of these large blocks of shares.

3. Ascertain how market futures are being traded. If there is an increasing number of index future traders buying short-sale contracts on the stock market, this is a sign of market negativity. Conducting a short-sale is wagering that the market will decline in the future.

4. Look for a declining currency value. For whichever market being followed, in this case the US stock market, note how that stock market's currency, in this case the dollar, is performing relative to other currencies throughout the world. A declining or unstable currency can undermine a market's strength, making companies in that market less profitable relative to the rest of the foreign companies in other stock markets.

Tips & Warnings

• Markets by their nature are unpredictable and, as the saying goes, past performance is no guarantee of future results.