Beware the Moody Market

07/17/2012 10:00 am EST

Focus: MARKETS

Steven Hochberg

Chief Market Analyst, Elliott Wave International

Public pessimism anticipates economic and financial downturns, while optimism is essential to a recovery, says Steven Hochberg, chief market analyst at Elliott Wave International.

Sentiment and the way traders and investors feel about the market is very important to what is going on. Our guest today is Steve Hochberg to talk about how he looks at it. So Steve, at Elliott Wave, I know you have kind of a different way of looking at social mood. How do you do that?

We do. Our view is that social mood regulates social trends...in other words, the mood comes first and then the events come second. You need to concentrate on the mood.

The standard view is just the opposite. For example, the standard view is that recessions cause businessmen to be cautious. But the way we look at it at Elliott Wave International is that cautious businessmen cause recessions—it is exactly the opposite. Like when you talk about markets, people say a rising stock market makes people more optimistic. But the way we look at it is optimistic people make the stock market rise.

So it is mood that determines the trend and what we do at Elliott Wave International is try to ascertain where we are within this mood, because mood tends to pattern according to a specific dimension and formulation that R.N. Elliott came up with back in the 1930s. So what we are constantly doing is looking at mood trends within the market, and we are looking for extremes, because mood tends to be extreme at the turning points.

So you really feel like you can look at a chart and can see the social mood in that chart? Is that how it works?

Exactly, because the market is the best indicator of mood. It’s just a reflection of how people feel at that moment in time, and they register their optimism or the pessimism by buying and selling stock.

So while the mechanism of the market may change—you might have a proliferation of exchanges or off exchanges or instruments that you trade—the underlying premise of it is still human beings interacting with each other. And that mood doesn’t change, whether it was in 17 whatever or 19 whatever.

When people think about sentiment too, they think of maybe the Commitments of Traders Report and see how many traders are long verus short, does that play into your idea at all?

Yeah, that’s great. There are a number of indicators. The CBOE put/call ratio, how many people are buying puts relative to calls. The Commitments of Traders Reports, how many speculators are long or short...that is all wrapped up and that all reflects the sentiment of the moment.

What we are looking for is the extremes, because they tend to occur near turning points in the market. If you can identify that, you can get ahead of those turns.

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