Australia is at risk of an imminent market correction that would leave thousands of older Australians approaching retirement out of pocket, analysts warn.

Key points: Australian shares are near record highs while interest rates are near record lows

Australian shares are near record highs while interest rates are near record lows Analysts say the disconnect between the two usually means that one market will be "spectacularly wrong"

Analysts say the disconnect between the two usually means that one market will be "spectacularly wrong" However, analysts also the Australian share market is not heavily overvalued

Several analysts have told PM a major stock market correction is imminent.

Reserve Bank governor Philip Lowe admitted in June he did not understand why the bond market was pointing to a recession while the stock market was screaming boom times ahead.

Generally, stock markets improve with the economy, so a rise in the stock market normally coincides with rising interest rates.

Right now, the exact opposite is true.

"Something's clearly wrong," veteran market watcher Marcus Padley said.

"Why are interest rates going to be 0.75 per cent by the end of the year? What's so terribly wrong?"

"You wouldn't imagine there's much wrong if you take the post-election euphoria about taxes and the housing market into account.

"But that is the story being told by the bond markets and clearly nobody quite knows what it is, but so far it's been very good for equities and clearly no-one is really considering what the root problem is."

'Bond markets are screaming' economic downturn

Saxo Capital Markets strategist Eleanor Creagh supports that view.

"It's highly likely investors are going to have to be a lot more discerning throughout the second half of this year," she said.

"Both bonds and equities have delivered outsized returns to date, but someone is going to end up spectacularly wrong as the current disconnect is actually irreconcilable.

"If the business cycle continues to deteriorate, equity markets are going to have to face reality and, I guess, surrender to what the bond markets are screaming, and our bets are with the bond market being correct at this stage."

Many share market analysts look at charts of the ups and downs of share price movements to gauge trends.

When stock prices run up very quickly, one indicator known as the Relative Strength Index (RSI) rises above a critical line.

It has just risen above that line, pointing to a stock market fall.

The market is now trading above the Relative Strength Index, portending a fall. ( Supplied: Marcus Today )

Ms Creagh warns a major stock market correction is possible.

"I would say potentially a 10 per cent correction, or somewhere in the region of 10 to 20 as well," she said.

Marcus Padley goes a little further in his warning of a market downturn.

"So clearly a market correction, for whatever reason, if it's going to be a significant one would be somewhere in the range of 15 to 25 per cent," he said.

If there's a major rattle, recovery should be quick

A big stock market fall can cause a lump in the throat for anyone heavily invested in the share market, or who is in, or approaching, retirement.

As the stock market approaches a record high, a key measure known as the price to earnings ratio shows share prices are above average relative to earnings, but analysts say they are not at extreme levels.

The price to earnings ratio on the ASX 200 is high, but not extreme. ( Supplied: Saxo )

Private client advisor James Rosenberg advised people to ride out any bumps.

"Don't forget that good companies are good companies, whether their valuation is high or low," Mr Rosenberg said.

"So if you do own quality investments, and the market does have a significant correction, just ride it out."

Ms Creagh said retirees should start thinking about where growth is heading in the next 12 to 18 months, and whether they want to remain fully invested in the share market.

"Really make sure that, overall, your portfolio has a low 'beta'," she said.

"That means that when the market moves down your portfolio is not going to be as susceptible to that market volatility."

Small investors look to the longer term

Kaiman Wong, an investor from Darling Point, NSW, has taken that advice on board.

"I'm personally looking for something in healthcare, or high tech industry," he said.

Kamian Wong, an investor from Darling Point, NSW, is not as worried as some about a market correction. ( ABC News: David Taylor )

Mr Wong is aware the stock market could fall over at any moment but, as the father of a young daughter, he is thinking long term and wants to start building a nest egg for her.

"I'm basically looking for a long-term investment, and the current situation, or the pricing currently will not be affected by my long-term investment strategy," he said.

But other investors are nervous about the potential for a market correction.

Former school teacher, 75-year old part pensioner Peter is still licking his financial wounds after a recent investment went south.

"I just lost $60,000 by selling Bank of Queensland when it tanked a few months ago," he said.

The stock crash came at a particularly bad time in life for Peter. His daughter, recently divorced, needed help paying her legal fees.

"It's pretty grim," he said.

"I should have kept bank of Queensland, but seeing I sold them, I'm just staying with Westpac and getting their dividends each year — I'll get some in November."

When asked if he was worried about a correction, Peter replied, "only from the point of view that if it went down really badly."