Wednesday, August 24, 2011

Following The Money In Volatile Markets

Volatile Markets and Increasing Conflicts: Learn How to Expect What Takes Others by Surprise

Volatile markets seem to come out of the blue: Just like no one expected the last two weeks of sharp drops and jumps in the stock markets. Or the 400-plus point drop on August 18. In a similar vein, hardly anyone expected the debt-ceiling debate in the United States to become such a fiasco either.

Unless, that is, you know something about social mood: When social mood begins to turn negative, a divisive feeling grows among people toward their representatives in government.

As Steve Hochberg and Pete Kendall write in the August 2011 issue of The Elliott Wave Financial Forecast (emphasis added):

"The sudden emergence of a vigorous opposition to the latest debt ceiling boost is a consequence of the turning tide of social mood. As one article notes, 'George Bush raised the debt ceiling seven times and did it pretty much without a whimper.' In mid-July, by contrast, a Gallup poll found that 42% of Americans wanted their congressman to vote against raising the debt ceiling, while just 22% were in favor of the vote."

"The turning tide of social mood" means that as optimism turns to pessimism, stock markets reflect that mood in more bearish trends. And there are other telltale signs that people and their leaders are less willing to tolerate one another. For instance:

People begin to lose faith in their leaders: Notice President Obama's popularity numbers dropping.

They also lose faith in their economic leaders. For example, the Fed is less revered than it used to be, something that Bob Prechter has predicted in his Elliott Wave Theorist. Think of Texas Governor Rick Perry telling supporters that Fed Chairman Ben Bernanke's actions could be treasonous. You wouldn't hear those words if social mood was positive and the markets were bullish.

Governments become more restrictive. For example, they ban short selling, as they recently have in France, Belgium, Italy and Spain.

These words and deeds might seem out of sync with business as usual. But if you study how waves of social mood turn from positive to negative and back again, then current events that seem unexpected to others can seem right on target to you.

For more background, here's a description of what signs to look for that social mood is turning more negative and pessimistic. It's taken from Prechter's Perspective, a book that includes interviews Bob Prechter has done with financial writers over the years.

This alternating current of ebullience and conservatism goes back to the most basic Elliott wave idea: Bull markets give way to bear markets, and vice versa. What are the essential ways in which bear market moods differ from those of bull markets?

In bull markets, people focus on progress and production; in bear markets, they focus on limits and conservation.

OK, I can see that. What else?

Bull markets result in increased harmony in every aspect of society, including the moral, religious, racial, national, regional, social, financial, political and otherwise. Bear markets bring polarization. With that realization, you can predict increasing cooperation in all those areas in bull markets, and increasing conflict in bear markets.

It’s hard to imagine turning bearish when peace is breaking out all over or turning bullish on society in the depths of scary times.

A scary world is perfect for stocks and a perfect world is scary for stocks. When the world appears perfect, most investors have their money in the market, and there is little or no buying power left to fuel the uptrend and nowhere to go but down. When it appears scary, stocks are cheap and hold huge upside potential.

So people get it backwards.

Exactly, people consider these to be the events that shape their futures, but they only reflect the past trend of social mood.

What is it that people are unprepared for now?

The bear market will bring back nationalism, racial exclusion and perhaps even religious conflict. Thinking technically about events, that is, observing what they reveal about social psychology, prepares you for those changes, whereas trying to predict the future from the events themselves leads you to the opposite, and wrong, conclusion. It cannot be stressed enough, because life-or-death decisions can depend upon your assessment. Notice what marks the major bear market lows of just the last 200 years — the Revolutionary War, the Civil War and World War II. Those were buying opportunities.

Get Ahead of the Curve -- Be the One Who Expects the Unexpected to Happen at a 57% Discount

You can begin to see the future social, financial and economic trends with a subscription to EWI's Financial Forecast Service. It includes the Elliott Wave Financial Forecast, the Elliott Wave Theorist (new issue publishes on August 19), and the Short-Term Update. And you also get your own copy of Bob Prechter's Conquer the Crash: You Can Survive and Prosper in a Deflationary Depression.

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