Social Trends and Stock Prices

03/28/2012 8:00 am EST

Focus: MARKETS

Steven Hochberg

Chief Market Analyst, Elliott Wave International

The downbeat mood as seen in recent entertainment suggests more pain ahead for stocks, says Steven Hochberg, chief market analyst at Elliott Wave International.

We’re talking with our guest, Steve Hochberg, about social trends and how they affect equities. So, Steve, tell us your views on that question.

It is a great question, because our view at Elliott Wave International is a little bit different than the standard view. The standard view is that social action effects social mood…and that is, people take action and countries go to war and because of that, people get very pessimistic.

But our view at Elliott Wave International is that mood precedes action. It’s the exact opposite way. So, for example, the standard view would be that recessions cause people to be cautious. But our view would be is that cautious people cause recessions. It’s exactly the opposite of the way most people think.

So what we’re constantly doing is looking at some of the mood trends in the market, and these mood trends throughout society manifest themselves in stocks, they manifest themselves in culture and the types of movies we see. Maybe fashion…skirt lengths. When people get very pessimistic, skirt lengths tend to go down. When they get optimistic, skirt lengths tend to go up.

It’s very interesting that a lot of popular movies that have been nominated for Oscars and so forth this year have been very depressing movies. For example, Brad Pitt in The Tree of Life, or George Clooney in The Descendants, or Hugo. I don’t know if you’ve seen any of these movies. They’re very dark movies.

Now, they have optimistic themes in them, because obviously Hollywood wants people to come and see them, but the very genre of the movies tends to be very negative and pessimistic. We take this as a sign that the social mood itself is very pessimistic, and we think that this mood is going to start manifesting itself in sort of other trends. For example, the stock market.

So we use this as one sign we use to help forecast, confirm, or refute some of the things we’re seeing, say in the models, and so it turns us very bearish on the markets going forward. A little bit different than a lot of what other people are talking about…but we think it’s very interesting to look at.

Is there a way that individual investors can incorporate some of this thought process into their portfolio management?

Absolutely. In fact, it really can give you a leg up on how to position your portfolio.

When you see these manifestations of negative mood and of pessimism throughout society, it kind of gives you a signal that maybe you want to get a little bit more defensive. Maybe you want to raise the level of cash that you have in your portfolio relative to taking risks.

And also, the opposite is true. When you start seeing popular music get very bubblegum again, or fashion get very colorful, or moods get very upbeat, maybe that’s a time to maybe take a little bit more risk in your portfolio. I think right now it’s telling us that you want to be a little bit more cautious going forward.

Now I know you’re also a technician. So how does one mix these qualitative views with the more technicals that you see on charts?

They go hand in hand. That’s a great question, because what we do is we look at what’s happening in mood and society, and then we see that being manifested in a lot of the indicators we’re seeing.

A lot of the sentiment surveys, are they showing increased optimism or increasing pessimism? For example, put-call ratios or surveys of how people feel about the market.

Another one we look at, another survey, is Market Vane’s Bullish Consensus, which takes a survey of investment advisors and CTAs, commodity trading advisors. That just went to a multi-year high recently, showing a big outbreak in optimism.

People take that to mean that the market is going up. But what we do is we look at it in the opposite way, and we say when we see an excess of optimism, it’s a sign that we’re closer to the end of the trend than we are at the beginning, where people tend to be more pessimistic.

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