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Understanding Market Fluctuations and Recessions
Like most things, markets fluctuate around their average. In the event of good news, they run ahead; in the event of bad news, they fall behind, and sometimes they get carried away with their own euphoria. Nevertheless, they can come out of any critical situation thanks to their special feature: their own “self-healing” powers. However, this rests on one important precondition: they must be protected from outside manipulative intervention. It is very appealing for regulators to intervene in the market. In fact, many think that it is their duty to do so, leading to market distortions, which, in turn, invite more interferences, inevitably creating a vicious cycle. This way, markets stagger constantly between regulatory influences and their self-healing forces, which leads to a natural equilibrium following every exaggeration phase.
When mentioning recessions and depressions, the most used examples are the big depression of the 1930s, the dotcom bubble in 2000 and the real estate bubble in 2008. All three events were disastrous for most investors and speculators. Recessions usually follow economic booms. During these phases, companies increase their profits, which in turn leads to a boom in the stock market. Rising stock prices attract the attention of the public, who swarm to the stock markets in large numbers to get a piece of the cake and achieve their dreams of wealth and security. While stock prices continue to rise daily and the unwary masses seek financial fortunes long considered lost, an increasing number of businesses form without a solid business plan. Even these “companies” find generous backers in the crowd. The larger the stock market bubble becomes; the more newcomers are attracted. Initial doubts arise when the first sellers are faced with a lack of buyers for their overpriced shares. Panic breaks out and everyone rushes to exit at the same time. As a result, share prices drop like a waterfall. The 1920s bubble and its subsequent burst is an excellent example of this phenomenon. After the bubble burst, the Dow Jones Index (DJI) reached its lowest point on the 8th of July 1932 at 41.20 points, decreasing by 89.19%. This crash lasted 840 days. Prior to that, on the 8th of August 1898, the DJI broke through the 41.2 barrier for the first time, taking 8,462 trading days or 17.57 years to reach its all-time high of 381.20 points on the 3rd of September 1929.
Although each asset bubble that preceded these economic disasters had a different cause, they all had similar courses. When comparing the time between the number of trading days and the all-time highs with the number of trading days until the crash, it becomes evident that crashes occurred 10 times faster compared to the rise. The panic illustrated in these examples can be compared to the one elicited during the March 2020 crash.
Thanks to technological advancements, news spread quickly– one would believe that markets have reached near-perfect efficiency. However, reality shows that there still is a minority of people who are more knowledgeable than the majority. Technological advancements, combined with financial market innovations, have unquestionably led to market democratization. It has never been easier for individuals to invest small amounts. Even though these advancements have led to the enormous successes of a few “small investors” who have become role models for the masses, most small investors have failed. They replicated the mistakes of generations of inexperienced and naïve investors and speculators, who squandered their hard-earned money on a high-stakes game with a slim chance of winning. Several centuries later, the same has happened. Many individuals who lived through this experience and lost a large portion of their fortune due to poor decisions abandon the stock market without learning anything from it or about themselves. Most people are relieved to have escaped the meltdown unscathed, and, out of shame, you will find them rarely speaking about it. However, a handful learn from their mistakes and go on to become seasoned investors and speculators.
The Birth of ONE-SIGNAL: A Response to the Dotcom Bubble
One-Signal was developed following the great awakening caused by the dotcom bubble burst. After realising that most investors base their decisions on their emotions, the goal was to identify these emotions in the market. We therefore believe that markets are driven by powerful emotions: fear and greed. Greed attracts investors to speculate even in a dangerous market environment, leading to irrational exuberance and thereby to the formation of asset bubbles. Conversely, fear leads to panic and mayhem.
The Power of Sentiment Indicators in Trading
For this reason, One-Signal is purely based on sentiment indicators, as we believe that these best gauge the prevailing emotions in the market. One-Signal therefore stands on two pillars: sentiment indicators, and a contrarian approach.
The goal of ONE-SIGNAL is to identify in which phase the market is currently in, and to anticipate subsequent developments by analysing the emotional state of market participants and detect trend reversals. Thus, we always consider the mass and all types (from small to big) of investors in our analysis.
Our vision is to provide investors all around the world with the best information possible to eliminate these emotions during their decision-making processes. Our philosophy is simplicity. We are aware of the time constraints of individuals nowadays, and therefore keep our daily information short and precise. Our aim is to alleviate the stress investors face every day, as we believe that everyone should have the opportunity to make decisions without emotional burdens. This system has been proven to be an exceptionally effective and profitable tool for the daily prediction of market movements. By using this tool, we assist the aforementioned small investors in making the right trading decisions. Our goal is to democratise trading tools which were previously only accessible to high-net-worth individuals and financial institutions.
Simply put, we are the essential information tool investors can’t go without.