Sometimes, a recession is also accompanied by a bear market, but this is not necessarily true. Each period of recession typically lasts for at least a few months. Bear markets on the other hand, historically stretch from a few weeks to several years.

Yet, prior to the stock market crash on March 12 caused by the coronavirus outbreak, investors enjoyed a record-breaking 11-year bull market.

What does this show? For one, there is no sure-fire method of predicting a market crash.

But let’s start with the basics, shall we?

What is a stock market crash?

A stock market crash refers to an event where there is a sudden and steep drop in, well, stock prices. The crash may also affect asset classes such as bonds and commodities.

A crash happens when investors start selling their stocks to cover their debts or margin calls. Investors may also panic-sell their stocks in a bid to cut losses.

According to Chua Boon Siang, an equities specialist at Phillip Securities, a market crash is usually caused by one key factor – “fear”.

“Fear will weigh on the market’s sentiment, and panic selling will exacerbate this downward spiral,” he says.

What should investors do during a market crash?

Your first priority, as an investor, is to minimise any potential losses.

“With stocks held for trading, we closed all (investment portfolio) positions when stop-loss conditions were triggered,” says Daryl Guppy, an international financial technical analysis expert and CEO of Guppytraders.com, in an interview with The Edge Singapore on March 11.

Stop-loss, or a stop-loss order, refers to trade orders given to brokers to start selling stocks upon falling to a specific price point.

However, instead of sending stop signals at the end of the day, as is the regular practice, Guppy switched to adopting “intraday stop signals” instead.

“Instead of acting the day after the signal was given, we acted as soon as the stop-loss signal was given. This is designed to protect capital,” he says.

Phillip Securities’ Chua recommends would-be investors to “stay on the sidelines until there is confirmation that this (price) dip is over”.

Is there a way to predict a stock market crash without the benefit of hindsight?

The short answer is no. However, according to Chua and Guppy, there are trends that investors can look out for.

“The movement of the stock market is more or less a reflection of the health of the economy. In theory, the economy will cycle between expansions and contractions, which investors can use these business cycles as a guide to predict the next expansion or contraction phase,” Chua says.

Guppy agrees. “For the past few months, we have said in our weekly newsletter that investors and traders needed to be alert for the development of end-of-trend behaviours in the market,” he says.

To accurately predict when a market will tank, though, is near impossible.

“Pinpointing a market crash based on guidelines is virtually an elusive skill. Some investors may attempt to forecast a stock market crash using different technical indicators such as moving averages, volume and wave counting,” says Chua. However, in reality, “using technical analysis is based on the past data of the market and may not be reflective of market conditions going forward,” he adds.

For Guppy, market crashes usually come after several months. Hence, there is “plenty of time to prepare and react,” he says.

“The market collapse came more rapidly, and moved much further than we anticipated. This occurred because it is a broader panic reaction to a non-economic factor,” Guppy adds, comparing the March 2020 crash to the Global Financial Crisis in 2007 to 2008, which “came with plenty of warning”.

To hold or not to hold?

In a nutshell, hold only when the company’s fundamentals are sound enough to tide it through the crash.

Chua advises long-term investors to “choose to hold and ride out till recovery” should they “believe in the… fundamental performance of a company”.

On the other hand, short-term investors “may decide to sell and cut their losses”. They should also “choose another time to invest (in the market).”

“This is why it is very important to set a stop-loss when investing to minimise losses during a crash. (And protect your profits in a bull run),” Chua adds.

For Guppy, unless you hold stocks that are “deep in the money”, or profit-making stocks, investors looking to hold their losses should think twice.

“This collapse did not have that warning, but chart analysis helped to quickly confirm the seriousness and significance of the retreat. Which is why positions were closed quickly, as opposed to holding on, and hoping for a rebound,” he says.

Guppy also warns that some industries may not recover as quickly. “Industries that are going to suffer long-term pain, such as airports and airlines, were sold to lock in profits and free up capital for a potential re-entry in several months’ time,” he notes.

Make the right decisions in good times, and in the bad

If you’re looking for a way to protect your portfolio during a market crash, there is no foolproof way to do so.

“The idea that you can (prepare your portfolio for a crash) is flawed thinking,” Guppy says. “In truth, a portfolio is made defensive by the action you take as an investor.”

“If your portfolio loses 15% instead of 25%, then it is cold comfort to say that your portfolio was better than another,” he adds. “Truly defensive portfolio management makes sure that the capital loss is much more limited. This can be achieved by aggressive hedging using Contract For Differences (or CFDs) and defensive profit-taking.”

Again, when it comes to building defensive investments, there is no fixed formula. In fact, Guppy says, “in this type of non-economic panic, the most badly hit are the very ‘defensive’ stocks that many advisors recommend, such as airlines, logistics companies, banks, infrastructure groups, and tourism. They all get hit because they are all sold down as a result of Exchange Traded Fund selling.”

See also:

• When is the best time to buy stocks
• The end of the 11-year US bull market
• Fed's imminent cuts send US markets up but Asian markets remain jittery
• Where should investors turn as market carnage rages on amid pandemic panic?
• Is the coronavirus a bull market signal?
• Here’s what to do during a bear market

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