What are some signs that the stock market might crash?
Although it is impossible to predict the next stock market crash, what   are some signs or measures that indicate the economy is unstable? These questions are really two sides of the same coin.  As such, there's really no way to tell, at least not with any amount of accuracy that would allow you time the market. Instead, follow the advice of William Bernstein regarding long-term investments.  I'm paraphrasing, but the gist is: Markets crash every so often.  It's a fact of life.  If you maintain financial and investment discipline, you can take advantage of the crashes by having sufficient funds to purchase when stocks are on sale.  With a long-term investment horizon, crashes are actually a blessing since you're in prime position to profit from them. There are some economic signs as there are in all economic and business cycles, such as interest rates rising. However, a more effective way is to actually look at price action itself. The definition of an uptrend is higher highs followed by higher lows. The definition of a downtrend is lower lows followed by lower highs. So if you are looking to invest for the long term you can look at the weekly or even the monthly chart of the market say over the past 10, 15 or 20 years. Using these definitions on say the S&P500 if the price continues to make higher highs and higher lows then stay in the market. If the price makes a lower high than the previous high, then this is a warning sign that the trend may be about to end. The trend has not broken yet but it is a warning sign that it could be ending soon. If the price makes a higher low next followed by a higher high, then the trend continues and you just need to keep an eye on things. If, however, the price makes a lower low after the lower high this is a signal that the uptrend is over and you should get out of the market. If the price makes a lower low directly after a higher high, then be cautious and wait for confirmation that the uptrend is over. If you then get a lower high this is confirmation that the uptrend is over, you would then sell if prices drop below the previous low. If you invest in individual shares then you should keep an eye on the charts for the index and individual shares as well. The index chart will give you an indication if the uptrend is over for the whole market, then you can be more cautious in regards to the individual shares. You can then plan exit points on each individual share if their trends are broken too. If you have stop losses employed and the trend reverses on the index, this would be a good time to tighten your stop losses on individual shares. You can then buy back into the market when you determine that the downtrend is broken and prices start to show higher highs and higher lows again. Will there be occasions when the uptrend reverses and then after a short period starts trending up again, yes there might be, but the worse that will happen is that you pay a bit of extra brokerage to get out and then back into the market, and you might have to pay some capital gains tax on any profits made. But remember no one ever went broke making a profit. The most important thing to remember when investing is to conserve and protect your capital. I would rather pay some extra brokerage and some capital gains tax than see my portfolio drop by 50% or more, then take 5 years or more to recover. And remember, paying tax is a good thing, it means you made money. If you don't want to pay any tax it means you will never make any profits, because if you make profits you will have to pay tax one day.
"I can think of a few reasons for this. First, bonds are not as correlated with the stock market so having some in your portfolio will reduce volatility by a bit. This is nice because it makes you panic less about the value changes in your portfolio when the stock market is acting up, and I'm sure that fund managers would rather you make less money consistently then more money in a more volatile way.  Secondly, you never know when you might need that money, and since stock market crashes tend to be correlated with people losing their jobs, it would be really unfortunate to have to sell off stocks when they are under-priced due to market shenanigans. The bond portion of your portfolio would be more likely to be stable and easier to sell to help you get through a rough patch. I have some investment money I don't plan to touch for 20 years and I have the bond portion set to 5-10% since I might as well go for a ""high growth"" position, but if you're more conservative, and might make withdrawals, it's better to have more in bonds... I definitely will switch over more into bonds when I get ready to retire-- I'd rather have slow consistent payments for my retirement than lose a lot in an unexpected crash at a bad time!" This is not hypothetical, this is an accurate story. I am a long-term investor. I have a bunch of money that I'd like to invest and I plan on spreading it out over five or six mutual funds and ETFs, roughly according to the Canadian Couch Potato model portfolio (that is, passive mutual funds and ETFs rather than specific stocks). I am concerned that if I invest the full amount and the stock market crashes 30% next month, I will have paid more than I had to. As I am investing for the long term, I expect to more than regain my investment, but I still wouldn't be thrilled with paying 30% more than I had to. Instead, I am investing my money in three stages. I invested the first third earlier this month. I'll invest the next third in a few months, and the final third a few months after that. If the stock market climbs, as I expect is more likely the case, I will have lost out on some potential upside. However, if the stock market crashes next month, I will end up paying a lower average cost as two of my three purchases will occur after the crash. On average, as a long-term investor, I expect the stock market to go up. In the short term, I expect much more fluctuation. Statistically speaking, I'd do better to invest all the money at once as most of the time, the trend is upward. However, I am willing to trade some potential upside for a somewhat reduced risk of downside over the course of the next few months. If we were talking a price difference of 1% as mentioned in the question, I wouldn't care. I expect to see average annual returns far above this. But stock market crashes can cause the loss of 20 to 30% or more, and those are numbers I care about. I'd much rather buy in at 30% less than the current price, after all. The total value of the stock market more or less tracks the total value of the companies listed in the stock market, which is more or less the total value of the US economy (since very few industries are nationalized or dominated by privately held companies). The US economy has consistently grown over time, thanks to the wonders of industrialization, the discovery of new markets, new natural resources, etc.  Thus, the stock market has continued to grow as well. Will it forever?  No.  The United States will not exist for ever.  But there's no obvious reason it won't continue to grow, at least for a while, though of course if I could accurately predict that I would be far richer than I am. Why do other countries not have the same result?  China is its own ball of wax since it's a sort-of-market-sort-of-command economy.  Japan has major issues economically right now and doesn't really have the natural or people resources; it also had a huge market bubble a while back that it's never recovered from. And many European countries are doing fine.  German's DAX30 index was at around 2500 in 2004 and is now at nearly 13000.  That's pretty fast growth. If you go back further (there was a crash ending in around 2004), you can see around the fall of the Berlin wall it was still around 2000; even going that far back, that's about an 8% annual bump.  The FTSE was also around 2000 back then, around 8000 now, which is around 5% annual growth.   Many of these indexes were more seriously hurt than the US markets in the two major crashes of this millenium; while the US markets fell a lot in 2008, they didn't fall nearly as much as many smaller markets in 2002, so had less to recover from.  Both DAX and FTSE suffered similar falls in 2002 to 2008, and so even though during good periods they've grown quite quickly, they haven't overall done as well as they could have given the crashes. "Assuming you are referring to macro corrections and crashes (as opposed to technical crashes like the ""flash crash"") -- It is certainly possible to sell stocks during a market drop -- by definition, the market is dropping not only because there are a larger number of sellers, but more importantly because there are a large number of transactions that are driving prices down. In fact, volumes are strongly correlated with volatility, so volumes are actually higher when the market is going down dramatically -- you can verify this on Yahoo or Google Finance (pick a liquid stock like SPY and look at 2008 vs recent years). That doesn't say anything about the kind of selling that occurs though. With respect to your question ""Whats the best strategy for selling stocks during a drop?"", it really depends on your objective. You can generally always sell at some price. That price will be worse during market crashes. Beyond the obvious fact that prices are declining, spreads in the market will be wider due to heightened volatility. Many people are forced to sell during crashes due to external and / or psychological pressures -- and sometimes selling is the right thing to do -- but the best strategy for long-term investors is often to just hold on." If the equity market in the USA crashed, its very likely equity markets everywhere else would crash. The USA has a high number of the world's largest businesses and there are correlations between equity markets. So you need to think of equities as a global asset class, not regional. Your question is then a question about the correlation between equity markets and currency markets.  Here's a guess: If equity markets crashed, you would see a lot of panic selling of stocks denominated in many currencies, but probably the most in USD, due to the large number of the world's largest businesses trading on US stock exchanges. Therefore, when the rest of the world sells US equities they receive cash USD, which they might sell for their local currency. That selling pressure would cause USD to fall. But, when equity markets crash there's a move to safety of the bond markets. The world's largest bond markets are denominated in which currency? Probably USD. So those who receive USD for their equities are going to spend that USD on bonds. In which case there is probably no correlation between equity markets and currency markets at all. A quick google search shows this kind of thing Yes, this phenomenon is well documented.  A collapse of an economy's exchange rate is coincidented with a collapse in its equities market.    The recent calamities in Turkey, etc during 2014 had similar results. Inflation is highly correlated to valuations, and a collapse of an exchange rate is highly inflationary, so a collapse of an exchange rate is highly correlated to a collapse in valuations. While debt increases the likelihood and magnitude of a crash, speculation, excess supply and other market factors can result in crashes without requiring excessive debt. A popular counter example of crashes due to speculation is 16th century Dutch Tulip Mania.  The dot com bubble is a more recent example of a speculative crash. There were debt related issues for some companies and the run ups in stock prices were increased by leveraged traders, but the actual crash was the result of failures of start up companies to produce profits. While all tech stocks fell together, sound companies with products and profits survive today. As for recessions, they are simply periods of time with decreased economic activity. Recessions can be caused by financial crashes, decreased demand following a war, or supply shocks like the oil crisis in the 1970's. In summary, debt is simply a magnifier. It can increase profits just as easily as can increase losses. The real problems with crashes and recessions are often related to unfounded faith in increasing value and unexpected changes in demand. I agree with this article entirely. There is tons of securities in the market that are trading wayyyy above book value because of future expectations of growth. Investors more than ever are overpaying for the possibility of something that might happen several years from now rather than a couple of years. Who can predict any numbers  accurately 3+ years from now? It's getting ridiculous. Then you have your Goldman Saxes that are trading under book value because of concerns about regulatory reform in the future. Investor sentiment and consumer expectations used to be a macroeconomic gauge, but not every single sector is singled out and over analyzed. Long gone are the days of being able to truly understand economic cycles.