by Bob Stokes
Updated: June 26, 2017
The patterns of investor psychology are the same the world over, and have repeated throughout financial history. Let's look at stocks in the U.S. and Japan, then and now, and see if we can find similarities.
[Editor's Note: The text version of the story is below.]
No matter which country -- or what time period in financial history -- the patterns of investor psychology are always the same.
Examples are legion, but the point can be illustrated by focusing on the U.S. some decades ago, and then Japan today.
Let's first review the psychological setup of the U.S. stock market in early autumn of 1985. Sentiment was extremely negative. Investors had sold short heavily and bought puts (also a bearish bet) at an all-time record rate.
The Sept. 30, 1985 Elliott Wave Theorist commented:
Keep in mind that when the public buys stocks late in a bull market, they often enjoy paper profits for awhile, but they are never allowed to keep them. Similarly, when the public sells short heavily, they may be profitable for a while, but they are inevitably forced to cover into a powerfully rising market. The psychological setup for the acceleration phase of Primary wave 3 is as close to perfect as it can get.
The time that the above analysis published is indicated by the word "setup" in the chart below:
You can see that the DJIA skyrocketed thereafter, and the overall uptrend stretched for another two years.
Now let's review Japan's main stock index. Here's a chart from our June 2017 Asian-Pacific Financial Forecast, which shows that the Nikkei 225 has advanced nearly 25% since the record short selling in 2016:
Our Asian-Pacific Financial Forecast editor, Mark Galasiewski, notes:
The 30-day moving average of short sales as a percentage of total value traded on the Tokyo Stock Exchange remains near record extremes.
Our Asian-Pacific Financial Forecast goes on to provide a forecast for the Nikkei 225, and elaborates on the subject of short-selling in a section which also includes a mention of Hong Kong's stock market.