Tuesday, May 26, 2009

More On Social Mood

The markets are ripping this morning on the back of some terrible housing news, and renewed tensions with North Korea. Of course, for those that follow the popular orthodox that "news drives the markets" this is a bit of a head-scratcher. So no doubt, they go searching for something else and come up with consumer confidence numbers that were "surprisingly" higher. Yes, that must be why the markets are 3% higher - and still climbing.

If one is still not convinced that social mood determines the interpretation of news, rather than reacting to the news, all one has to do is watch the early market hours and how headlines change among the mass media outlets. This morning's headlines were along the lines of "futures point lower on Case-Shiller home price data." A half hour after market open, they had reversed course and turned positive with no additional information. The Nasdaq alone rallied 2.3% from 9:30 to 10. At 10 o'clock the consumer confidence numbers were released and the markets rallied further. Now the headlines read "stocks jump as consumer confidence surges higher."

It doesn't pass the sniff test.

If stocks opened lower because of falling home prices, then why did they rally strongly in the first half hour of trading? Why are the worse than expected home price declines less important than the better than expected consumer confidence increases? If the markets were lower now, what do you think the headlines would focus on? Home prices or consumer confidence? Home prices obviously. So what determines the news? Is it whatever "most" people think is "most" important? Or does the market's reaction determine how we interpret the news?

The market has its own preferences based on the underlying social mood which determines how news is interpreted. Social mood is in the process of correcting the collapse in optimism we saw last autumn. So while mood is improving, nearly any piece of news will be greeted with a positive slant. Even terrible news can be construed to be positive if one focuses on a certain component or a "second derivative."

Socionomic Theory contends that social mood in humans patterns itself much the same as countless other creatures pattern their behaviour, and the stock market is the best barometer of social mood we have. What this morning's trading tells us is that the wave of optimism is still rolling. The decline we saw over the past few weeks was not met with a corresponding drop in optimism.

If I were looking for a lasting top to this market (which I am), I would be looking for a change in character in social mood. I would be looking for a certain datapoint or comment from a highly respected person that would normally be considered bullish to be completely ignored and for headlines like "stocks drop substantially despite optimistic comments from Buffett."

Until something like that occurs, expect the markets to wind higher and squeeze the shorts into oblivion.

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Occdude said...

A couple of key resistence points coming up that if penetrated would make me bullish. Gold near a 1,000 and the S&P near a grand. I just don't know if there is enough momentum to bull past these points. There is a lot of money on the sidelines waiting to jump in now but now they only have their big toes/maybe a foot in the market now.

I think the market gets choppy from here with a retracement back to the mid-upper 700s and then a capitulation buying spree just strong enough to lure in the scared money and snap shut.

I think the major move in the market has already happened. We go back and forth from here until we head decidedly south. Keep your eyes on inflationary pressures namely oil. If inflation starts to creep, the bond market in it's nervous state is going to squawk and that will be negative for stocks. The central bank will get the phone call from the bond market and the Chinese are as nervous as hell, so it wont take alot to spook them.

In the bearish scenario you outlined, you could put widows and orphans short the market. I would watch for prohibitions against shorting this time around however. I got clipped in SKF when they decided that you couldn't short the banks anymore, so sellers beware.

Roger Jarema said...


I'm not very sure if there really exists "sideline money" waiting to jump in. It's been claimed by many, but I think the theory is not right. For a rebuttal of the theory, please see these ones:


As for the market, there are some divergences from the "good stuff". Oil broke its intermediate-term highs but oil stocks just fail to break their intermediate-term highs. This kind of relationship ended up in a huge plunge in those commodities stocks last year. I wonder if this time it will be the case again.

Occdude said...

You can't claim frozen money velocity without "money on the sidelines" meaning that although money is not dead, it is sleeping in government bonds. Also, when the market goes up, the dollar goes down. That means money moves from dollar investments to equities. Money if it is on the sidelines is sitting in "cash" ie. dollars. When they cash in their dollars they drive up equities and drive down government bond prices.

There still is money on the sidelines, but factoring in nervous investors still stinging from pre march deflation and therefore holding higher levels of cash than before, there is enough for a pop, but we definitely will not get a bang IMO leading to choppiness with eventual unbrideled optimism "capitulation buying" to be followed by eventual capitulated selling once the bull realizes its in a trap.

Thanx for the links BTW

Matt Stiles said...


Much of the "sideline cash" being raised by most is simply a rise in the level of savings. Whereas before, gains in the stock market felt like such a sure thing that even short term cash could comfortably be employed there, I highly doubt people will come to that same conclusion in the years ahead.

The rise in the savings rate is here to stay. Out of necessity. Sell siders will constantly bemoan the money that "belongs" in the stock market sitting "idle" (in case of emergency, loss of job, etc). But that is irrelevant. The savings rate will rise.

Roger Jarema said...


It seems your time projection is impeccable (you planned to post on treasury default sometime this week). Well, today witnessed the crazy action again. Now with the rout on long-term treasuries massive & brutal.

I think it's the market's mechanism to punish the recklessness of the policy makers. So, I guess there are 2 choices left for these people to make:
1. save the bankers & kill the treasuries OR
2. save the treasuries & kill the bankers.

No choice is also a choice, btw :)

By saving the bankers, I think they come to terms w/ the fact that treasury yields are shooting up like nuts.

With treasury yields shooting up, mortgage rates are going to go up through the roofs at the times when housing demand at the lowest and prices depressed. This, of course, will put even further deflationary pressures on prices -> the very thing govt is trying to ease/avoid.

Of the most interesting action today, the dollar is strengthening as the treasuries are routed. The better part of the last decade, it was the reverse that was happening.

So, I guess I'll be eagerly waiting for your takes on this. Is the end game nigh?

Anonymous said...

Matt, the headlines are a joke. I've been watching them a lot in the last couple years. When the stocks swing and, it appears, based on nothing, it's like some guy at CNN Money takes a dart and whips it at a board and comes up with.... "Stocks rebound on IBM earnings!" It's a joke.

dacian said...


Believe it or not, yesterday before going to bed I read your last blog on social mood and talked with my wife about it :) (she's a sociologist).

This socio-economics thing is getting more & more attention; the question I have for you is what actually made the social mood to change, say from 2007 optimism towards pessimism we had in November 2008, wasn't the accumulation of bad data which shaped the mood, which in turn influenced action (ie selling stocks if we talk about markets)? Of course it's not only economic data, it's plenty of things shaping the mood, but in 2008 I think a lot of bad news contributed to the psychology change. So this social mood driving action is a bit like chicken & egg; which drives the other? is it a sudden change in psychology (how's that possible?) or is it bad news shaping psychology (from good to bad) which in turn drives action? So in the end it looks like we have bad news which is the root of action (via the change in psychology which induce).


Matt Stiles said...


Socionomic Theory holds that humans are very similar to other creatures. Birds migrate before the weather actually changes.

People instinctively sense that after such a long period of optimism, their future expectations should start to moderate. Others pick up on this. It snowballs.

There are more scientific explanations for this of course. Many believe (and I have not found a reason to disbelieve) that social mood is patterned by what are known as elliott waves, where the magnitude is determined by laws based on fibonacci numbers and so on.

It is a very abstract subject to wrap one's mind around. But once the originating logic is understood, it follows perfectly.

I suggest a trip to socionomics.net (link to the side of my page). There you can view a 30 min film on the theories (requires a free registration - no junk mail thereafter). Otherwise, any of the books written by Robert Prechter and others would be sufficient. One of those is on my long summer reading list...

dacian said...

Oh yeah, I definitely hear about Elliot waves and Prechter (actually I'm reading blogs trying to employ this to predict the market - it works pretty well) as well as Fibo retracements (used by the Elliot wavers as well).

I wanted to add something about this socio thing. If the social mood is really bad, how's that there is "positive" action on the stock market at that extreme? (stocks climb). One might answer "there are no sellers left", but instead out of nowhere, there are buyers. If the social mood (extreme pessimism) drives action, there should be no buyers. It is my feeling that this thing is highly speculative (Elliot wave as well) as those buyers, with huge amounts of money - actually quite a lot so to create higher demand than is selling, and there is a lot as pessimism induces that - are trying to take advantage of this situation.

There is also Gustave Le Bon, my wife recommended me his books on herd behavior and crows psychology.


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