Indicator to predict market crash?

Q – Aren’t there indicators that the stock market is likely to crash soon?

A – There are three adjectives we should talk about in your question: likely, crash, and soon. But first, let's talk about indicators. There are several well-known and followed metrics that value the market, such as the Price/Earnings Ratio or P/E. While it’s based on hard numbers, such as the price of the stock, the number of shares, and corporate earnings, the interpretation of the P/E value is subjective. We know the long-term average is about 16; does that mean that 22 is expensive? Or, only if it’s above 25? Everyone has an opinion. While widely followed and available metrics exist, the problem is that many others, such as order flows and size, are not easily accessible to individual investors. These metrics are typically only available to brokers and professionals, and they can indicate shifts in sentiment.

Now let’s discuss “likely”. A bit like the randomness of the weather, there are many days when conditions increase the probability of rain, but it doesn't rain. We know the forecast is not a certainty but a probability, maybe a higher or lower probability now, but that changes hours later. But if it doesn’t rain now, we know it will sometime. With investing, you need to accept that crashes (and corrections) will happen from time to time. In fact, you could say it is likely there will be future crashes and corrections, but you just can not predict when.

Finally, what about “soon”? It seems that when there have been many years of above-average increases, there will be a crash or correction, sooner rather than later, because of an increased probability. But sooner or later is just that; next week, next year, or two. Because of the unpredictability of a trigger to cause a crash or correction, the best an individual investor can do comes down to three things; (1) be aware of the “value” of the market as being expensive or cheap (which informs decision to consider buying more or by less), (2) have investments postured to withstand years of deep negative returns if the money is needed within 10 years (thus, why retirment savers should start backing off risk in their late 40s or early 50s, (3) ignore the noise of pundits and talking heads expressing opinions of what will happen tomorrow.