How to Identify an Overvalued Market?
All stock market investors know that markets go through periods of euphoria and panic. During periods of euphoria, investors keep on buying shares in the hope of a higher payoff. In technical terms, this is the situation wherein the entire market becomes overvalued. The opposite of this also happens when fear grips the market, everybody starts selling all their shares and the market becomes undervalued.
The problem is that overvalued and undervalued markets are normally seen in hindsight. Most investors believe that the market that they are in at the present moment is fairly valued. If the market is overvalued, experts often come up with theories that suggest why this time it is different and why overvalued markets are going to be the new norm. Hence, if an investor is genuinely able to ascertain whether or not a particular market is overvalued, they have a definite edge over the others in the marketplace.
In this article, we will have a closer look at some of the factors that help investors identify overvalued markets.
How to Identify an Overvalued Market?
An overvalued market can be identified by making comparisons with the right frame of reference.
Interpreting Undervaluation and Overvaluation
To sum it up, the two metrics mentioned above do provide a mechanism to identify overvalued and undervalued markets. However, it needs to be understood that the recommendations cannot really be blindly followed. This is because there may be other factors involved too. Hence a thorough understanding of such factors is necessary before making any investment decisions.

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