Advice from those in the securities industry isn't always trustworthy. History has shown that various indicators can actually create confusion, such as during Japan's economic bubble or the East Asian financial crisis. The stock market is no different. They say there are signs to watch for to predict a market peak, but how reliable are these signs?
Indications of a Market Peak
When stock prices surge dramatically, related books flood the market, and stories about ordinary people profiting from stocks become widespread. For instance, in 1985, the stock index was around 130, but it skyrocketed to over 1000 by early 1989. This period is famously known for farmers selling their livestock and land to invest in stocks. However, by 1992, the index had dropped to 500, and many farmers who suffered losses were driven to desperate measures.
A similar situation occurred in 1999 when the KOSDAQ index soared from 700 to 2800 in less than a year but then plummeted to 500 within a short period. Many people borrowed money to invest in stocks during this time, marking a clear indication of a market peak.
Investor Behavior
During a market bubble, the number of full-time investors increases sharply, and even elementary schools may introduce stock-related subjects. Stories of children making profits from stocks and mocking professional fund managers can be found in the media. This indicates that society as a whole is heavily involved in the stock market or that their parents have made significant gains. Additionally, the rapid increase in the amount of installment funds, which allow small investments, is another sign of a peak.
Various Signs of a Market Peak
The appearance of mothers with babies in stock brokerage offices, securities companies boasting about fund returns in advertisements, and a surge in new listings and rights issues all point to a market peak. Historically, the number of newly listed companies decreased during stock market recessions, while it surged during bull markets, such as between 2005 and 2007.
How to Identify a Market Peak
Some key conditions to identify a market peak are:
- A flood of books sharing stock investment success stories.
- Increased interest in stock investments from farmers, unemployed people, and children.
- A sharp increase in the number of full-time investors.
- A rapid rise in the amount of installment funds compared to lump-sum funds.
- The sound of babies crying in brokerage offices.
- Frequent advertisements for fund returns on TV.
- A surge in new listings and rights issues.
When all these conditions are met, it is likely a market peak. However, the problem lies in the ambiguity of these signs. For instance, how many books must be published, or how much interest must farmers and children show in stock investments? The rapid increase in installment funds and the frequency of TV advertisements are also unclear. Moreover, it's impractical to visit all brokerage offices to check for crying babies. These phenomena can also occur outside of market peaks.
Conclusion
While there are various methods to identify signs of a market peak, they are not always reliable. Often, it is only after the peak has passed that these signs become clear. Investors should use these signs as references while making cautious and comprehensive judgments. The signs of market peaks and troughs are better used by experts on TV to explain past events rather than as tools for active trading.
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