Stock market works on different cycles these are accumulation phase, markup phase, distribution phase, mark down phase to understand more click here. Whenever market moves up we never think market will more down and when stock market move down we never think it will move up.This is the biggest mistake of retail investor.
1. First early sign of stock market crash is increase in speculation activity in stocks and index.
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. Second sign of stock market crash is slowdown in economy.
Economy and stock market performance is directly prepositional. If country GDP growth is slow and unemployment is increasing, inflation is increasing it indicates the macro economy of country which is directly effect the stock market . Whenever there is a divergence in growth and stock market performance it will lead to the crash in future.
3. Third sign of stock market crash is discounting all bad news and events.
The natural behavior of stock market is it move up when there is good news and move down when there is bad news but if stock market don't behave normally it is a early sign of stock market crash.
4. Fourth sign of stock market crash is Valuation of stock is at all time high.
If stock or Index trades higher than then historical multiple of EBITA then it leads to correction on stock and index. Big investors never invest at higher valuations this is very impotent parameters which is never discussed.Whenever there is divergence between EBITA and stock price it leads to correction.
5. Fifth sign of stock market crash is bad news in banking sectors.
Banking sector is the backbone of the economy and it there is problem in banking sectors it will reflects in the stock market eg. lehman brother.
6. Sixth sign of stock market crash is decrease in interest rates .
Low interest rates create a high liquidity situation which generate a demand bubble in the system which leads to higher valuation of the stock market it it burst some day. If there is divergence in bond yield and interest rates it create a stock market crash situation .
7. Seventh sign of stock market crash is increase in gold price.
There is inverse relationship between gold price and stock market. If gold price increases it can lead to stock market correction.It is the early sign so keep a watch on 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 stock market every times it finds a new reasons so stay alert and keep monitoring these parameters.