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Tech stock bubble still has further to pop, expert warns

Posted: 6 July 2022 12:39 pm
News
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Technology stocks have been the hardest hit in 2022, but the pain isn't over for these investors, Saxo Bank warns.

The technology heavy Nasdaq 100 is already down nearly 29% year-to-date.

But Saxo Bank's technical analyst Kim Cramer Larsson believes the index is in a "clear bubble pattern".

"If this time around is no different from other bubbles – it never is – the Nasdaq should drop down to at least around 9,736," the analyst says.

"We are currently only 12% from that level."

He also points out when the market falls, it will fall quickly.

"The implosion of a bubble is usually at least twice as fast as the build (prospect theory, where the pain of losing is 2 to 2.5 times as hard as making a gain)," Cramer Larsson warns.

Avoiding the bear trap

The investment bank shows that the market is likely to correct, although this is an incorrect signal to buy.

Most commonly, retail investors read the market wrong and pour money into assets when they believe it is going from a downwards to upwards trend.

In technical analysis, this is a bear trap.

"When a bubble implodes, the price will always come back to at least the peak of the last larger correction, but quite often also to the bottom of it," Cramer Larsson says.

As such, Cramer Larsson believes the bottom for the Nasdaq 100 will likely be in 2023 and 2024.

What should you do?

Despite the current market volatility, associate professor at RMIT Dr Angel Zhong believes retail investors should come up with a trading plan and stick with it.

Even if the market could continue to fall.

Dr Zhong highlights a good long-term investment plan will stop investors falling into traps that will cost them profits over their investing life.

"Switching to cash will be really costly, especially if you switch in bad [economic] times," Dr Zhong told Finder. "[Investors] switch to cash in bad times and buy equities in good times, so they are effectively selling low and buying high. But to make any profit you need to sell high and buy low."

"So if you're investing with a long-term perspective, always just stay the course and don't let fear or greed take over," Dr Zhong said.

The associate professor also warns that you'll unlikely be able to time the market, meaning you should simply stick to your long-term plans.

"Market timing is not an easy skill to possess. Not even professional investors and fund managers are good at market timing. So I wouldn't advise any retail investor to try and time it," she concludes.

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