What creates the markets' larger trends?
- News and current events
- The price of oil
- Earnings reports
- All of the above
- None of the above
It's so tempting to answer this question with D, isn't it? But if you have been reading about wave analysis and the Elliott Wave Principle, you know that the answer is actually E. Because the true mover and shaker of the financial markets -- and news events, oil prices and earnings reports, for that matter -- is something called social mood.
Put simply, when overall social mood is positive, or rising from negative to positive, then people feel like buying stocks, bonds and commodities -- and the financial markets reflect that mood by being bullish.
The opposite is just as true: when overall social mood is negative, or falling from positive to negative (now being a perfect example of this kind of social mood), then people feel like selling stocks, bonds and commodities -- and the financial markets reflect that mood by being bearish.
Once you understand that it's the underlying mood that the markets reflect, then you can also make the leap to realize that that same social mood also influences the news and current events -- not the other way around. So, if you are reading the political and business news avidly to try to figure out where the markets are headed, you've got it backwards.
Here's how Bob Prechter explained it to columnist Conrad deAenlle on CBS's Money Watch.com on May 28, 2009:
Buy low, sell high. Sounds easy enough. Why do so many investors, including experienced, highly paid pros, do the opposite and fail to beat the market by wide margins? They’re not even taking a random walk - more like turning into every dark alley they stroll by.
Waves of social mood regulate investors’ aggregate behavior. As people feel increasingly optimistic, they buy stocks, and when they feel increasingly pessimistic, they sell them. This is why indicators of market psychology show bearishness at bottoms and bullishness at tops. It’s not that the market’s action is making them feel this way; it’s that their feelings are causing the market’s action. This is a much better explanation than random walk, for two reasons: It explains why even pros are wrong in the aggregate over a full cycle, and it explains why some exceptional people can beat the markets; they have learned to invest against their natural emotional states.
The inability to make sense of the markets seems to persist despite the availability of more information than ever. How come?
People . . . think [that[ news should move the market around, but it doesn’t. News is a report of the social actions taken in response to waves of social mood. So people who dig through the news for causes are actually studying results. Analyzing waves of social mood at least gives you a look at the present, not the past, and if you use our Elliott wave model, you can often get a peek at the future, too.
Market Analysis 201 – Dispelling Myths From Economics 101
If you're new to Robert Prechter's Elliott Wave Theorist, the May 2009 issue is the perfect place to start your journey. It's an exceptional resource for busting the widespread myths that surround market analysis, market timing and bull-bear causality. More info…