The S&P 500s valuation had surged by over 30% last year. Considering this information, the recent market slide might have indicated a possible stock market bubble burst, but it is best if traders do not jump to conclusions. Of late, some financial pundits have been speculating a possible burst by comparing the market scenarios that exist now with the conditions that existed during March, 2000.
Even though some turbulence is witnessed in the market today, it does not come close to the conditions that existed earlier. Investor sentiment is a major factor that drives market dynamics and often affects the nature of trade that occurs in any given time. Malcolm Baker and Jeffery Wurgler have discussed the implications of investor sentiment in their study entitled, “Investor Sentiment in the Stock Market”.
The study highlights 5 key indicators that are useful in understanding the extent of investor sentiment and the possible impact that it could have on the investment decision. Lets analyse the market conditions of today and those which existed during 2000 to get a comparative analysis of investor sentiment.
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- IPO Volume
The first three months of 2000 bore witness to approximately 123 issues while only 58 issues have been achieved in the same period this year.
- IPO Returns
The first quarter of 2000 indicated that the first day return of the average IPO went up to a staggering 96%. In 2014, the figures indicate only 22% for the same conditions.
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- Dividend Received on Premiums
During March, 2000 companies made speculations that had values which were 43% higher than the stocks that were paying out dividends. In comparison to that, the current values for the S&P 1500 index only shows 26%.
- Turnover of Shares
The annualized turnover rate for NYSE listed stocks was 89% for the first quarter of 2000 while the same period revealed a rate of 58% this year.
- Corporate Cash Share Derived from Issuance of Equity
The equity share during the first quarter of 2000 stood at 20% while the recent data reveals the equity share to be 11%.
Conclusion
None of the indicators have shown that the present conditions are heated enough to cause a bubble burst. The conditions in 2000 were clearly optimistic and showed the heightened participation of people in the trading activities. It is best to wait it out and be prepared in case the situations turn against the market conditions. But a similar bubble burst is not an obvious probability.Another best way of earning profit from this market is Day Trader Software these are the best trading systems which can be very useful for stock market trading.
