STOCK MARKET IS OVERBOUGHT. TOO LATE TO INVEST!

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(Free-Press-Release.com) January 26, 2004 -- STOCK MARKET IS OVERBOUGHT. TOO LATE TO INVEST!



There�s no need to explain what a stock market collapse means Traders are afraid of it and hope this will never happen again. But it always does. Stock market crises are taking place quite often. The problem is how to estimate when this crisis will happen again. How to forecast when a stock market bubble is ready to blow up? It�s very important to estimate the moment of a collapse.

We will try to do it by using instruments based on regression model. CAPM is a well-known regression model that is able to estimate asset risk in comparison with stock market index. It estimates stock market movement after market loses its balance. CAPM determines the balance conditions.

To test this system it is essential to select a country with long financial history. The history should comprise stock market bubbles and collapses. In this example we choose USA. And we select the main well-known indices, such as blue chips Dow Jones, technology-laced Nasdaq Composite and broader Standard and Poor�s 500 Index.

We have to compare stock market indices with Gross Domestic Product, to estimate if market oversold or overbought. We choose as a dependent variable stock market index, and as an independent variable GDP. These two variables can be presented in percent as a difference between first date and the settlement date divide by its first year value. Such variable allow us to compare different indices in single country and indices of different countries.



It becomes obvious if you take a look on the rate of change. When rates of change are more then 1, stock market is considered risky. The more the rates of change the more it�s risky. When slope is less then 1, we can say that stock market is underestimated and during the some period it will aspire to 1.



For instance, to calculate rate of growth for GDP 1980 we have to deduct GDP 1995 from GDP 1980 and this negative deduction compare with the 1995 date.

Let�s compare 3 main American indices to find common features. The Dow Jones Industrial Average The Nasdaq Composite Index, and the third one S&P 500.

It�s obvious, that these three main indices have common behavior in these three patterns. Stock market growth rate outstrips economy growth. Stock market is overestimated. This situation is lasting for a long time, and now it�s getting even worse.

It�s clear that stock market indices have dependence. As a result of it let�s review the dynamic of main American index Dow Jones.

Linear part locates between 1980 and 1990. It can be revealed by line with an angle 1.14. In this period stock market rate of growth a little bit bigger then economy rate of growth.

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