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Stocks: Why Are Investors "Getting Worried" Only Now?
A fast look at the recent DJIA rally raises interesting questions.
Since its June 12 top at 8799, the DJIA has lost close to 6 percent. Blame the economic data, say the mainstream financial analysts. "Lowered expectations for the global economy are giving investors more to be wary about," stated a June 22 Associated Press article, referring to the World Bank's recent pessimistic forecast.
What's ironic is that much grimmer news besieged the economy in early March, when the Dow began the 35% rally that climbed from the bear market low to the June 12 top. In fact, throughout the entire three-month rally, "fundamentals" improved only moderately, yet the Dow kept on climbing with confidence. Until now, that is.
So, a reasonable question to ask here is: Why would investors who disregarded "bad fundamentals" for more than three months suddenly be worried about them? You have to agree that neither circumstance speaks highly for investors' ability to make rational decisions.
Some analysts say that "the stock market got ahead of itself." Perhaps, but that again implies that investors leaped into stocks and pushed the Dow some 35% higher without much justification. If the news drives the stock market and investors are rational, how can that be?
It's a puzzling and paradoxical situation, but only until you look at it from an Elliott wave perspective. The Wave Principle teaches that "fundamentals" neither create nor drive trends in the stock market. Yes, news reports can and often do send prices into volatile spikes. But it's clear that major, broad trends in the stock market are created by something else. What?
Social mood. Its intangible influence, according to socionomics*, shapes stock market trends. Mood changes first, that's why trying to predict the markets by following the news will usually leave you puzzled. Here's how Robert Prechter, EWI's president, puts it his May 2009 Elliott Wave Theorist (online now; excerpt):
Have you ever watched a dog interact with its owner? The dog repeatedly looks at the owner, taking cues constantly. The owner is the leader, and the dog is a pack animal alert for every cue of what the owner wants it to do.
Participants in the stock market are doing something similar. They constantly watch their fellows, alert for every clue of what they will do next. The difference is that there is no leader. The crowd is the perceived leader, but it comprises nothing but followers. When there is no leader to set the course, the herd cues only off itself, making the mood of the herd the only factor directing its actions.
To anyone not versed in socionomics, everything the stock market does is saturated with paradox. The exogenous-cause model fools investors exquisitely. One reason is that rationalization follows upon mood change. Mood change comes first, and attempts at reasoning come afterward. Socionomists recognize that social mood is primary ... so we never have to wrestle with paradox.
This orientation does not mean that we are always right. It means only that we are not doomed to be chronically wrong. Once you get used to the world of socionomic causality, the irony and paradox melt away, and everything makes perfect sense.
"Simple logic based on external causes does not work in predicting financial markets," Bob further explains in the current, June Theorist. Try putting social mood first -- our publications can help you do that right now.
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*Socionomics is a new science of social prediction with an amazingly wide scope of application. The Socionomics Institute's monthly Socionomist can show you some examples right now.