Are we at the point of “maximum risk” in stock markets?

    By
    Nicole Jeary
    -
    maximum risk
    Signs suggests the current market may be approaching the point of "maximum risk".

    With historic rallies and gains across global stock markets, are we beginning to approach the point of “maximum potential loss”?

    According to psychological theories of the cycle of investment, market downturn and perhaps even volatility may indeed lie ahead. Have we therefore reached the point of where investors are most at risk of losing money?

    Headlines have been dominated with record highs in US stocks and positive forecasts from analysts, typifying the period of market “euphoria” and investment optimism.

    According to psychological investment theory, such emotion in the market coincides with the point of maximum financial gain and the point at which investors are most at risk.

    At the other end scale, the point of maximum potential return is when the market is in capitulation and despondency. Barron Rothschild, an 18th century nobleman from the British banking dynasty, said:

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    “The time to buy is when there’s blood in the streets.”

    Sell Signals

    Signs that the remarkable market upturn is reaching its peak have already begun to materialise.

    According to JP Morgan Chase, retail investors are markedly more bullish than institutional investors – which suggests perhaps, the unprecedented rallies may be starting to show signs of the beginning of the end and return to “normalisation”.

    “Investors are normalizing their equity fund buying; this is a return to normal,” Nikolaos Panigirtzoglou, a global market strategist at the U.S. bank, stated in a phone interview, echoing such sentiments.

    Some analysts have even gone as far as saying market are set for severe volatility. Dr Doom, Marc Faber said “very simply, the market starts to go down. As it goes down, it will start triggering selling, and then it will be like an avalanche,” going on to say; “I would underweight U.S. stocks.”

    According to the most recent figures, The Global Investor Confidence Index North American investors remain the most optimistic ICI rose 3.8 points from 90.9 to 94.7, alongside this US stocks continue to surge to new highs to 2100. Traditionally however, the boom and bust of capitalism always manages to rear its ugly head.