Are there reasons to worry about a stock market crash as markets rise?

Recently, many market commentators got excited as the FTSE 100 closed above 7,000 for the first time since the Covid stock market crash. In the US, markets right now are also looking very strong, particularly the S&P 500. But as markets rise, are there reasons to fear another stock market crash?

Some of the signs of a stock market crash

Helpfully, Jim Slater’s book The Zulu Principle lists some of the signs of a coming crash. I’ve paraphrased these here. There are others, of course, but these are what I see happening now. 

• Investment advisors are bullish —when professionals are very bullish it could be seen as a sign of groupthink, and a lack of focus on fundamentals (such as profit, cash flow and so on). The latter are very important for long-term investing, I’d argue.
• New issues — an abundance of rights issues and new listings, leading to lower-quality companies that may be less profitable and not shareholder-focused. Arguably, Deliveroo is an example of this.
• Insider trading — the ratio of selling to buying by directors is often at a high level. I see signs of that whenever I look at director dealings. I think there’s a lot more director selling for ‘meaningful’ amounts, although of course there are notable exceptions. That worries me because why are they selling large amounts if they’re confident in the outlook? Recently the Best of the Best chief executive sold £41m of shares. The chairman of Wizz Air, Bill Franke, last month sold £400m of his shares. Director buys tend to be far more modest. 
• Party talk — at the peak of the market, everyone is talking about shares. That’s true especially for those who’ve never previously expressed an interest. The GameStop short squeeze, investing social media stars and increased investment in cryptocurrencies are all potential examples of this.

On the other side of things, interest rates remain low, central banks are pumping money into the economy and it’s still possible to find shares with low P/E ratios (probably more so in the UK than in the US).

What I’ll do about potential red flags

There will rarely be an absolutely clear sign to sell until it’s too late and a stock market crash is happening. The key I think is to have an investing plan and hold shares in good companies I really believe in.

The problem with trying to anticipate a bubble bursting is I may miss out on the strong bull run that often precedes the crash. Timing the market is difficult, as any experienced investor will know.

That’s why, despite some red flags and concerns, I won’t try to time the market. If I invest in good companies, keep cash aside for special opportunities and invest for the long term, I think I can make money by share investing. Also, I don’t add costs by dipping in and out of the market. That’s what I intend to do, despite reservations about a stock market crash.

The FTSE 100 still look like an undervalued index. That seems to be because value shares are prevalent. However, such shares are doing well at present and that trend could continue for some time. I’ve no idea when there will be another stock market crash, so I’m going to keep investing in companies I think can survive in any market.