Reckless thinking bodes ill for stocks

The Shanghai Composite Index finished out last year at 3,234.68 points, a multi-year high. Against a backdrop of relentless market gains, many buyers have thrown caution to the wind, eschewing any and all risk-hedging strategies.

Stock prices have surged over recent months, pulling millions of new investors into the market, as evidenced by surges in trading account registration and daily turnover volumes. While things may be going well now, the bull-run could end at any moment. In fact, the ebullience which has underpinned recent gains could be petering out even now. Newly opened brokerage accounts declined from roughly 890,000 between December 8 and December 12 to around 547,000 between December 22 and December 26.

A precipitous increase in margin trading has also been whipping stocks to even loftier heights. But once the market shows signs of wavering, it will be those trading on credit that will likely sell off first - or face significantly amplified risk of financial loss.

Obviously, there are many uncertainties facing China's stock market. In general though, it's usually a bad sign when investors start thinking of themselves as impervious to loss.