2024 Q2 Analysis: Is the market set to crash

Generating Alpha: What does this mean?

As we enter the second quarter of 2024, there’s widespread speculation among investors and analysts about whether the market is headed for a crash. Recent fluctuations and global economic uncertainties have heightened concerns. Additionally, persistent high inflation is dampening the Federal Reserve’s willingness to adjust interest rates in the short term. Meanwhile, consumers are contending with soaring grocery costs, and elevated home and rental prices, leading to less disposable income for discretionary spending. 

Investors who benefited from the S&P 500’s strong performance in the first quarter of this year are now pondering what’s next. Will the market continue to climb, or are we facing a potential downturn? This uncertainty may prompt some investors to consider contrarian investing strategies to navigate shifting market dynamics.

 

Current Market Analysis

No investor or economist has a crystal ball to predict the future – and the concerns of an imminent stock market crash are present. In March, the S&P 500 delivered a total return of 3.2%, buoyed by relatively positive economic data. As a result, the index is now up 10.6% year-to-date as of the end of March. Concerns about a potential U.S. economic recession have eased, and investors are now focusing on when the Federal Reserve will transition from tightening monetary policy to easing it.

 

Concerns Over Inflation and Federal Reserve Policy

The main economic indicator investors are concerned about is US inflation and therefore the FED’s interest rate decision. Last week’s US inflation data revealed an increase in the rate to 3.5% in March from 3.2% in February, which caused a notable concern in financial markets. This uptick, even described as unsettling, is significant because it suggests that inflation remains persistently high, well above the Federal Reserve’s target of 2%. As a result, the likelihood of the Fed cutting interest rates anytime soon diminishes, placing strain on the considerable debt burden accumulated in corporate America. The next few months will be pivotal for the central bank as it aims to achieve a “soft landing” for the U.S. economy—avoiding recession while preventing a sharp resurgence in inflation. Although concerns about recession have eased recently, the New York Fed’s recession model still suggests a 58.3% likelihood of a U.S. recession within the next 12 months.

 

Labour Market Resilience

A promising indicator for a soft landing is the resilience of the U.S. labor market. In February, the Labor Department reported that the U.S. economy added 275,000 jobs, surpassing economists’ expectations of 198,000 jobs. However, the U.S. unemployment rate inched up to 3.9% from January, marking its highest level since January 2022.

 

Historical Market Analysis

Ara Yalmanian, System Developer of ONE-SIGNAL, conducted some insightful historical research, revealing intriguing patterns in market performance. 

In the first quarter of the year, positive returns occurred 44 times (59%), while the second quarter saw positive returns only twice (16%). Since 1950, there have been more than 10% returns in the first quarter, including this year’s 10.83%, but the second quarter has been positive only 4 times, resulting in a slim 5.33% chance of closing positively.

This year, we saw 20 all-time highs during the first quarter, a phenomenon that has occurred only three times in the past 75 years. In those instances—in 1964 (+3.09%), 1987 (+3.97%), and 1998 (+2.32%)—the second quarters recorded positive returns.

The data shows that while positive returns in the first quarter have been relatively common over the years, the second quarter historically exhibits lower likelihoods of positive returns. Additionally, the occurrence of multiple all-time highs in the first quarter, a rare phenomenon seen only a few times in the past 75 years, has historically been followed by positive second-quarter returns in notable years such as 1964, 1987, and 1998. These findings offer valuable insights for investors navigating market trends and seasonal patterns.

 

How to Combat a Market Crash

There are several different strategies available for businesses to employ, in advance of a potential market crash.

Contrarian Investing

Contrarian investing is a strategy where investors deliberately oppose mainstream market trends, selling when others are buying and buying when most investors are selling. Warren Buffett, Chair and CEO of Berkshire Hathaway, is a well-known advocate of contrarian investing and sums it up correctly with the words: “Buy fear, sell greed.”

Contrarian investing is a strategy that involves going against prevailing market sentiment. Unlike conventional approaches that often follow trends or momentum, contrarians believe in exploiting market inefficiencies caused by emotional reactions or herd behaviour. They buy when others are selling and sell when others are buying, aiming to profit from eventual market corrections over time.

Benefits of Market Crash Scenarios

A contrarian investor enters the market when others are pessimistic about it. They believe that the market or stock is undervalued relative to its intrinsic worth, presenting an opportunity for profit. Essentially, when excessive pessimism drives down stock prices below their true value, the contrarian investor sees this as a buying opportunity that will yield returns once broader sentiment improves and share prices rebound.

During times of uncertainty, such as economic downturns or periods of heightened volatility, contrarian investing can be particularly advantageous. By capitalising on market overreactions, contrarians identify undervalued assets that may have been unfairly punished by short-term pessimism. This strategy aims to buy low and sell high over the long term, potentially maximising returns when markets eventually correct themselves.

Challenges in Market Crash Scenarios

However, contrarian investing is not without its challenges. Going against the crowd can be psychologically demanding, especially during extended periods of underperformance relative to the broader market. Accurately identifying undervalued assets also requires astute analysis and a deep understanding of market dynamics. Successful contrarian investing requires patience, discipline, and a strong conviction in the underlying investment thesis.

Differences from Traditional Approaches

Contrarian investing differs fundamentally from traditional investment strategies. While traditional approaches often prioritise buying strong-performing assets or sectors, contrarians actively seek opportunities where market sentiment diverges from the underlying fundamentals of an asset. This contrarian stance requires a willingness to be out of sync with prevailing sentiment and a focus on long-term value rather than short-term market movements.

 

ONE-SIGNAL: A Contrarian Investing Tool

ONE-SIGNAL was developed after numerous years of research on stock market bubbles and the behavior of investors as individuals and in masses. The development of these bubbles is attributed to three psychological factors, being greed, envy, and speculation. Conversely, fear, lack of confidence, and disappointment will cause these bubbles to burst. At ONE-SIGNAL, we believe that markets are driven by purely emotional factors.

Based on this, Ara Yalmanian developed ONE-SIGNAL, a non-discretionary system that applies the contrarian investing approach using sentiment indicators. The algorithm systematically analyses market sentiment to recognise emotions associated with bubble formations and predicts subsequent movements.


We believe that sentiment indicators are the best metric to systematically and objectively analyse stock market behavior and predict price movements in every phase of the market. This is based on years of proprietary research and successfully testing our findings in the markets. 

We do not use fundamental analysis to avoid valuation errors or technical analysis to avoid trend following. Some sentiment indicators we use are: 

  • Sentiment Surveys (AAII/NAAIM): Usually published weekly, members of certain organizations are asked about their current investments and expectations.
  • Volatility Index (VIX): Measures fear and is calculated using implicit volatility options of the S&P 500.
  • Put/Call Ratio: Indicates the relationship between purchased puts and calls, giving insights into the optimism or pessimism in the market.

Due to our unique approach, the system pinpoints sentiment trends and follows them until the exaggeration phase, to then change direction strategically. We are the only trading signal software provider to purely rely on sentiment indicators. As a result, we promote a smarter trading technique and a more efficient overall trading strategy.


Summary

As we navigate the uncertainties of the second quarter of 2024, investors and analysts are grappling with the possibility of a market downturn amidst persistent global economic challenges. While recent fluctuations and concerns over inflation have raised alarms, the S&P 500’s performance in March provided some respite. However, lingering worries about the Federal Reserve’s response to inflation and the resilience of the labor market add complexity to the market outlook. Historical analysis suggests potential challenges ahead, with the second quarter historically exhibiting lower likelihoods of positive returns. In this landscape, strategies like contrarian investing offer a unique approach to navigating market dynamics, leveraging sentiment indicators to identify opportunities amidst market volatility. ONE-SIGNAL’s innovative tool underscores the importance of understanding emotional factors driving market behavior, offering investors a smarter, more efficient trading strategy in uncertain times.

 

Sign up for ONE-SIGNAL today to discover how it can elevate your trading strategy in an increasingly technology-driven market, or get in contact with the experts behind ONE-SIGNAL’s success to learn more.

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**Disclaimer:**
This article is provided for informational purposes only and does not constitute investment advice, endorsement, or recommendation. The content within is intended to be general and should not be construed as professional financial or investment advice. Readers are encouraged to conduct their research and consult with a qualified financial advisor before making any investment decisions. The author and publisher of this article disclaim any liability for financial decisions made based on the information provided herein. Investments carry inherent risks, and individuals should exercise caution and diligence when considering investment options.

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