Tune Out The Noise

Social mood is taking over.

A very brief summary of Socionomic theory: it posits that waves of positive and negative mood propagate through society and that these waves have tell-tale characteristics in culture, politics and financial markets. Literally appearing as up and down waves in the stock market. The "strong" Socionomic argument says that all events are a product of mood.

Many people have trouble with getting past this first step because they're locked into thinking that events cause mood changes. A natural event such as a meteor hitting your house would be such an event because it's totally out of human control, but something like a stock market crash, recession or Apple missing earnings does not cause negative social mood (even if it makes Apple longs upset), rather these things are happening because social mood turned negative. Everyone is affected by it, even if you know about it. Only by completely detaching from human society can one avoid the effects of political polarization because it reflects social mood. The mass mood is everywhere there is society.

Almost everyone looks at something like Friday's drop in the market as being news driven, and certainly the news had some impact. Defense contractors jumped because there was news of a war coming to Ukraine. Yet, earlier in the day I posted Crash Time: Federal Reserve Destroys Credibility with Bullard Reaction. I didn't make an immediate call because I wasn't sure that Friday would be the day, but the "window" was open so to speak. There were traders who were looking for a move like this, this week. This raises the question: did skilled technicians and traders "know" the Biden administration would drop a news bomb on the market? No, because the flow of information is moving the other way. The news was produced by the same forces creating the technical signals.

Everyone can make educated guesses about what negative events might occur. The Federal Reserve or Russia tensions would be the top two. On January 16, I relayed someone else making such a prediction: False Flag Cyberattack on Financial Markets or Supply Chains Incoming. In 2020, the pandemic lockdowns happen right as the markets were signaling something bad could happen. The markets are in worse shape now, so worse news is possible. When this worse thing happens, people will blame the crash or bear market or recession on it. Traders reading the market are ahead of the news. They are watching the signals emanating from society, filtered into financial market prices and trends. Those same forces are producing the news.

The other "strong" Socionomic argument is that the stock market is always a reliable signal of mood. I do not accept this argument because I believe that over the past decade, the Federal Reserve's actions distorted the stock market such that the signal was dampened. Goodhart's Law kicked in. This produced the strange dichotomy of stocks at all-time highs (with localized positive mood among investors), but the horror genre dominating the box office, the emergence of "terror pop" and fertility hitting new recorded lows. Peak mood is associated with defined male and female roles in society (think action heroes and supermodels in the 1980s). During the negative mood of the 1970s, androgyny was popular (channeled into pop music by David Bowie for example). How to reconcile transgenderism, an extreme opposite of defined sex roles, with irreversible surgical procedures and a totalitarian imposition of it upon society, while at the same time having record high stock prices? Going through a list of cultural phenomena, I might predict stocks are at an extreme nadir in markets, perhaps the S&P 500 Index is below 1000 again.

Although I've focused more on charts lately because I believe the bear market is underway, in prior years I covered socionomics frequently. You can see prior posts with the Socionomics tag. The magazine cover signal is a classic example of socionomics in action, exemplified by this trifecta of repeat headlines in 1999 and 2020.

Practical Application

If the bear market is indeed underway, it means social mood is strong enough to overwhelm local manipulations of asset prices by the Federal Reserve. Fed actions had an observable, highly correlated impact on stock prices. Aside from the stocks tracking the balance sheet from 2008-2016 and from 2020-2022, every taper also produced corrections in various assets including equities. And here we are again with a taper and maybe QT, but also maybe the Fed is no longer relevant because...

The charts and technicals are working. We can make educated guesses about what bad news could be coming, but bad news is coming as long as the signals keep pointing down. The market is not falling because of a possible war in Ukraine. The market is falling because people are in a bad mood. They are nervous, sad, angry, uncertain, fearful. The U.S. government is instigating a war with Russia because USG bureaucrats and politicians are also in a bad mood. Russia will retaliate because, presumably, it too is experiencing this negative mood. Or maybe something out of left field will emerge, like a new pandemic, a major accident, a war somewhere unexpected. When this news happens, it's possible the technicals in the market will bottom out and signal a reversal. You want to be looking ahead, not distracted by the lagging news feed.

In conclusion, tune out the noise. The market is "predictive" because it is more sensitive to social mood than government bureaucrats and corporate news rooms. Markets become hypersensitive in extreme negative mood because emotions takes over. Fear is high, but more importantly uncertainty is high because emotions are not the basis for rational, planned activity. The surges up and down in prices, but generally down, reflects a market being overtaken by emotion. Bull markets are also driven by emotion, but it comes with certainty about higher prices, producing relentless and fearless buying of assets and overconfidence at the top, but this also producers longer-term, rational thinking during the early and middle phases. Right now, these two emotional forces have smashed against each other. Bulls are still relentlessly buying the dip and overconfident. Bears are primed for a relentless drop in prices. Only one will be correct.