Ask the average person (including the author of this article), and they will always say that a stock’s price falls more than it rises. Not only is this a novice’s skeptical outlook, but even stock market experts face a similar quandary.

The fundamental understanding is that stock price movements are mostly speculative. In theory, the concepts of buying and selling mostly rely on this simple parameter; more buyers = rise in a stock’s price. Similarly, the price drops when there are more sellers.

But what causes people to buy or sell? 

A company issues its quarterly or annual financial reports; if the report indicates a favorable financial performance, the stock price rises. Whereas, if the performance has been unfavorable, it may cause a fall in the stock’s price.

However, in the real world, factors influencing share prices are far more complex. It is determined not only by the fundamentals of the company it represents, but also by a variety of other factors. It’s a complicated puzzle, and it’s a tough nut to crack for ordinary people like us.

The breakdown:

Every investment comes with some level of risk. Equities, commodities, options, and exchange-traded funds (ETFs) can either help investors make small fortunes or completely obliterate them.

Conceptually, risk equals reward. 

Although the relationship between the two is not linear, it is imperative. No one can truly predict the stock market, but that doesn’t mean there aren’t trends to spot and capitalize on. One just has to know what to keep an eye out for!

An efficient market or stock is one that is priced at its true value. According to the efficient market hypothesis (EMH), or efficient market theory (EMT), stock prices reflect all available information about a company, and thus the share price is an accurate assessment of a company’s value.

The markets, however, are inefficient because many factors influence stock prices that have nothing to do with the company itself.

One investor may be bullish on the economy, whereas another may be bearish. Some investors may expect a favorable market, whereas others may be encouraged by a change in company leadership, the release of a new product, or their interpretation of the company’s relationships with its suppliers.

Investors “win” by capitalizing on market inefficiencies. They may choose to buy a stock that is trading at a discount to its true value or sell a stock that is trading at a premium due to momentum.

For example, if an investor notices a stock price increase, they will buy shares in that company, as will hundreds or thousands of other investors.

The share price continues to rise as everyone buys in. Eventually, the price rises to the point where investors begin to make a profit. The share price then begins to fall, bringing it closer to the stock’s consensus value.

Stock market crashes reverberate throughout history: 

While the stock market cannot be predicted, its movements do tend to echo over time. During the Great Depression, for example, the stock market recovered more than 40% after the initial crash before falling nearly 90% a few years later. Will this time be different?

This trajectory was similar to the rally that preceded the Great Depression. Add in 40 million unemployed people, a pandemic, and rising violence, and the economy may be in worse shape than the stock market indicates.

There are also some significant differences. The stock market during the Great Depression looked very different from today’s market – the companies alone are very different. Investors, too, have evolved.

Whereas institutional investors were more prevalent in the early twentieth century, many more people now invest in the stock market. These factors may have an impact on how the market reacts.

Leaving aside our current situation, paying attention to how the market moved during previous downturns can provide some insight into what is likely to happen in the future.

How to Make Stock Market Predictions?

There is no crystal ball, but keeping an eye on various indicators can help one navigate the choppy waters. For example, historically, when the VIX rises above 50, it is considered a good time to buy stocks. 

Many investors are also interested in other indicators like the 10-day moving average, that can help determine whether a stock is overbought.

In conclusion:

No one can predict the stock market, but there are clues along the way that can one help identify when the risk is higher or lower.

Many investors use these cues to determine when to invest more or less money. After all, it is the ability to generate risk-adjusted returns that distinguishes the average investor from the professional investor.

• Add some of these stock market predictors to your current due diligence
•  Consider these elements to be tools in your toolbox (but they should not be the only ones you consider)
• Remember that the stock market is inefficient and unpredictable, so do your homework!

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