How To Understand Social Mood & Market Behavior

How To Understand Social Mood & Market Behavior6/29/2007 1:55:08 PM
http://www.elliotwave.com
Which came first, the chicken or the egg? Can't answer that classic conundrum? Then, how about this: Which comes first, the news event or the social psychology? In this excerpt from Prechter's Perspective, Bob Prechter answers a reporter's questions to get to the heart of which comes first.
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Excerpted from Prechter's Perspective, published 2004
Over the years, you've extended your stock market studies to the economy, popular culture and social trends. On Wall Street, it is common for observers to consider the market's performance to be a by-product of politics in Washington or the latest global crisis, with such phenomena cited as causal explanations for market behavior. According to you, the correct temporal relationship is the other way around. The market precedes social change, because the market is a "coincident register of mass emotion." Is there really a foundation for making such sweeping observations?
Bob Prechter: Yes. Exactly. Almost everyone believes that social actions cause changes in social psychology. If that is true, then events must be so perfectly determined that they create the Elliott wave patterns we see in the markets. For people to claim that the latest idea from the White House or the latest law passed by Congress or the latest statistic on the trade deficit or earnings or war or natural disaster has any effect on the market's pattern, that such things are determinants of stock prices in any way, is suggesting a far more radical view of the harmony of the universe than I am. In other words, to argue that events cause the state of social psychology is to argue that events are patterned, which is determinism. In that case, free will is invalid, in which case no one could make money from the Wave Principle, which we have shown can be done.
On the other hand, if social psychology guides the tenor of social actions, then it is only mass psychology, which is apparently a process governed by the unconscious mind, that need be patterned to produce structure in markets. Its patterns underlie social behavior, and behavior ultimately produces results in the form of social action that are viewed as important events.
So given moods, or wave counts as you call them, always produce the same events or similar junctures in the count?
Bob Prechter: No. Social events are manifestations of a patterned social mood, but the moods may be manifest in countless ways. Social actions are an outlet for the patterns of mass psychology, expressing it in diverse ways that give rise to the myriad events of human history.
You don't consider fundamentals?
Bob Prechter: On the contrary, socionomists, as I call us, are the only ones who do so properly. The patterns of social psychology that occur naturally are the fundamentals of the market. They are what cause what most people think are the fundamentals.
On Wall Street, analysts contemplate the ramifications of events in Washington, Tokyo and all points in between as much as the people who make their livings there. Then they proceed to build a market opinion from an initial observation about a political or social event that they see happening. They say, "The Democrats are going to win, and the president is going to do such-and-such, and that's going to cause stock prices to…."
Bob Prechter: Right. And they have about as much success predicting markets as economists have predicting the economy.
Isn't it possible that there is no pattern – that the five-wave subdivisions in the market since 1932 are an accident?
Bob Prechter: That's the typical response from Wall Street observers: "Another coincidence." When patterns of this tremendous size continue to work out time after time, it becomes a matter of faith to continue to believe that the Wave Principle is not reflective of stock market behavior.
It's an elegant idea, but in the workaday world of Wall Street, the average broker or economist or reporter is going to say, "Ellio-huh? The Fed just raised interest rates."
Bob Prechter: And what do they say when the market goes up despite a rise in rates?
They don't talk about it.
Bob Prechter: Right. They find a different event they perceive as positive and say the market went up today because of that. It's easier than saying it's because a given wave pattern may or may not be in effect. A rise in rates is a matter of fact. That's something a broker can sell, an economist can speculate upon, a reporter can write about and an investor can grasp, all without doing any research.
The logic may be compelling, but the implications that flow from this idea demand an enormous re-ordering of one's mindset.
Bob Prechter: Yes, and accepting it as depicting reality is a bigger step. I am confident that people will take this step, though. I may present a radical theory of social causality, but it is the only one that makes sense.
The Wave Principle presents a profound truth: sometimes the dynamics of social psychology are impelling the mass mood toward optimism, and sometimes toward pessimism, regardless of all news. Events do not shape the market: it's the forces behind the market that shape events. Events are results, and when you know what they result from, that is, social mood trends, you can often predict the general tenor of such behaviors. If one knows the species of a tree, he can predict what kind of fruit it will bear. Events are the fruits of a bull or bear market in social mood.