Is a Market Crash Coming Soon: Rethinking Trends and Timing

Is a Market Crash Coming Soon: Reevaluating Trends for Future Insights

April 9, 2024

Introduction

The “collective mindset” concept has long fascinated philosophers, sociologists, and investors alike. While the power of collective thought and action can be harnessed for positive change, it can also lead to disastrous consequences, particularly in financial markets. By examining the insights of five influential figures from the 17th century to the present day and exploring two real-world examples, we can better understand how the collective mindset can falter in markets, leading to bubbles, crashes, and missed opportunities.

The Wisdom of Oliver Cromwell and Catherine the Great

Oliver Cromwell (1599-1658), the English military and political leader, recognized the dangers of blindly following the crowd. In a letter to the Church of Scotland in 1650, Cromwell wrote, “I beseech you, in the bowels of Christ, think it possible you may be mistaken”. This statement highlights the importance of questioning the prevailing wisdom and maintaining an independent perspective, even in the face of overwhelming consensus.

Similarly, Catherine the Great (1729-1796), Empress of Russia, understood the power of public opinion and the need to shape it to her advantage. She once said, “I shall be an autocrat; that’s my trade, and the good Lord will forgive me; that’s his”. Catherine recognized that the collective mindset could be manipulated and that leaders must be willing to act decisively, even if it means going against the grain.

The Contrarian Approach of Kirk Kerkorian and Bernard Baruch

In investing, Kirk Kerkorian (1917-2015) and Bernard Baruch (1870-1965) exemplified the value of a contrarian approach. An American businessman and investor, Kerkorian was known for his ability to identify undervalued assets and his willingness to go against the crowd. In 1969, he acquired shares in MGM Studios, eventually becoming the company’s largest shareholder and guiding it through restructuring and growth.

Bernard Baruch, a renowned financier and presidential advisor, famously said, “The main purpose of the stock market is to make fools of as many men as possible”. Baruch understood that the collective mindset of the market could lead to irrational behaviour and that those who could keep a level head and act independently stood to profit.

The Insights of Paul Beaty

*Paul Beaty, a contemporary financial analyst and author, has written extensively on market psychology and the dangers of the collective mindset. In his book “Is a Market Crash Coming Soon?”, Beaty argues that investors must be willing to question the prevailing narrative and think for themselves.*

*Beaty points to the dot-com bubble of the late 1990s as a prime example of how the collective mindset can lead to market excesses. During this period, investors became enamoured with the potential of internet-based companies, leading to a frenzy of speculation and overvaluation. When the bubble eventually burst, countless investors were left with significant losses.*

Real-World Examples: The Sriracha Shortage and the AI Frenzy

*The recent sriracha hot chilli sauce shortage is a poignant example of how the collective mindset can drive irrational behaviour in the face of scarcity. As the shortage persisted, demand for the popular sauce intensified, leading to a surge in prices on the secondary market. Opportunistic resellers capitalized on the situation, selling bottles for as much as $100 on Amazon and $70 on eBay.*

This example demonstrates how the collective mindset can lead to a disconnect between perceived and actual value and a willingness to pay exorbitant prices for a product that would otherwise be considered a mere condiment.

*Similarly, the current frenzy surrounding artificial intelligence (AI) and its potential impact on the stock market echoes the dot-com bubble of the late 1990s. Many investors have become convinced that AI will revolutionize the world and that investing in AI-related companies guarantees financial success. This collective mindset has led to a feeding frenzy, with investors disregarding traditional valuation metrics in favour of the promise of endless growth.*

The fallacy of Consensus

The fallacy of consensus in markets is rooted in the power of the collective mindset. When individuals become part of a group, they can lose their sense of individual responsibility and succumb to the impulsivity and irrationality of the crowd. This can lead to bubbles, crashes, and missed opportunities, as evidenced by the dot-com bubble and the sriracha shortage.

By examining the insights of influential figures like Oliver Cromwell, Catherine the Great, Kirk Kerkorian, Bernard Baruch, and Paul Beaty, we can understand the dangers of blindly following the crowd and the importance of maintaining an independent, contrarian perspective. As investors navigate the complexities of the market, they must remain vigilant against the fallacy of consensus and strive to make decisions based on reason, logic, and a deep understanding of the underlying fundamentals,

In the face of the current AI frenzy, low to medium-risk investors would be wise to consider reducing their exposure to stocks caught up in the feeding frenzy. As bullish sentiment rises, the potential for a significant surge in bearish readings looms. By questioning the prevailing narrative and acting independently, investors can position themselves to weather the storm and emerge stronger on the other side.

Conclusion Tactical Investor Insights

Let’s approach the situation from a purely contrarian perspective, a stance we don’t adopt without considering mass psychology.

The tech-heavy Nasdaq is being significantly influenced by a group of stocks, the ‘Magnificent Seven,’ closely tied to the AI sector. This has created a sense of market euphoria, which tends to be associated with speculative bubbles.

Furthermore, the rapid rise of Bitcoin over the past year has been pointed out as another sign of rampant speculation. Bitcoin’s value has been known to fluctuate wildly, and its recent surge could be another bubble waiting to burst.

Regarding euphoria, the masses are not exhibiting signs of widespread exuberance, though sectors like AI and Bitcoin may show some enthusiasm. However, this doesn’t justify a market crash. In the worst-case scenario, these sectors could face a more substantial pullback, with other sectors stepping in to fill the gap, as observed throughout history.

However, while valid, these technical, fundamental and contrarian factors do not provide a complete picture. This analysis is missing a crucial component, which we will address shortly.

What essential component is absent?

Recall that bullish sentiment remained below its historical average throughout most of 2022 and a significant portion of 2023. Despite the current excitement, bullish sentiment has not been able to remain at or above 55 for even two consecutive weeks. It briefly touched this level in December 2023 but hasn’t revisited it since. Last week, it touched 54 before dropping below 50 again this week, with the current reading at 49.

Until there’s a clear sign that the masses are ecstatic, Tactical Investors have only one strategy: Embrace all strong pullbacks. The greater the deviation, the better the opportunity.