By Ken Knight, MBA
Again thanks to all who are reading my blog! I hopefully have been able to explain a fairly new concept to you, that is, Socionomics, a new and exciting way to look at us as social creatures wanting to be part of the gang and its ramifications on music, the stock market, and so many other aspects of our lives. I have come across a video on YouTube that another person explaining the concept might reinforce what I'm trying to say. It's 30 minutes long but very interesting and I think something you can relate to. Don't let the name fool you. I learned a lot from it!
I hope it generates some dialog on the blog!
Here it is. Enjoy!
"Socionomics For 17 Year Olds"
The Bear Market Blog
Sunday, August 28, 2016
Sunday, August 21, 2016
By Ken Knight, MBA
For many years, and what I was taught in my investment classes for my MBA, the "Random Walk" theory was de regueur (in vogue). "The random walk theory suggests that stock price changes have the same distribution and are independent of each other, so the past movement or trend of a stock price or market cannot be used to predict its future movement. In short, this is the idea that stocks take a random and unpredictable path."(Investopedia). Meaning the price of a stock (or any market) cannot be predicted by its preceding price. Remember the story of the monkey throwing darts beating the pros?
What if I told you that the Random Walk theory has been debunked! All markets, although difficult to do, are somewhat predictable! There, I have said it! I have repeatedly said that humans are animals and therefore are subject to intense herding behavior.
Indeed, we behave closer to the proverbial lemmings that you might think! Let's take a look at why. It is a given that we are made up of the basic building blocks that all animals contain, including cells, tissues, and organs. If you look at DNA under a microscope, you cannot tell the difference between ours and any other mammal. We are of course blessed with a much more developed neocortex, the the part of the brain for the seat of reason (conscious thinking). But we also have parts of the brain that are the same as other animals such as the primitive brain stem, important for survival, and the limbic system that controls emotions. These lower level parts of the brain explain why we have a mind that includes unconscious impulsive thoughts. The brain stem (basal ganglia) controls our instinctive behavior. This includes "fight or flight", desire for pleasure, territorialism, breeding, and the selection of leaders (go figure!). The limbic system, controlling emotions and feelings, guides us towards self preservation. Sometimes regretfully, we have no control over the two lower brain parts. They are not connected to the "upper brain". If we sense danger, the less developed parts of the brain kick in and we run like hell (so to speak). It doesn't matter if it really is a threat, as long as we perceive it to be a danger, we react first and think about it later. It is that powerful!
So how does this relate to the stock market? Well, do to the lower brain areas, we want to align our knowledge and feelings with those of the "group" (of peers) and be accepted, whether it be a church congregation or investors in the stock market. Rational thinking goes out the window! We want to know the latest and the best so we hire a stock analyst, who consults with the Wall Street group who consult with each other on "what's hot and what's not". So "the herd" must know more
than we do so we'll follow the herd.
Let's see if I can demonstrate this.
Here's a group of charts. Look carefully and compare them:
Dow Jones Industrial Average:
S&P 500 Index
For many years, and what I was taught in my investment classes for my MBA, the "Random Walk" theory was de regueur (in vogue). "The random walk theory suggests that stock price changes have the same distribution and are independent of each other, so the past movement or trend of a stock price or market cannot be used to predict its future movement. In short, this is the idea that stocks take a random and unpredictable path."(Investopedia). Meaning the price of a stock (or any market) cannot be predicted by its preceding price. Remember the story of the monkey throwing darts beating the pros?
(c) Index Fund Advisors
Indeed, we behave closer to the proverbial lemmings that you might think! Let's take a look at why. It is a given that we are made up of the basic building blocks that all animals contain, including cells, tissues, and organs. If you look at DNA under a microscope, you cannot tell the difference between ours and any other mammal. We are of course blessed with a much more developed neocortex, the the part of the brain for the seat of reason (conscious thinking). But we also have parts of the brain that are the same as other animals such as the primitive brain stem, important for survival, and the limbic system that controls emotions. These lower level parts of the brain explain why we have a mind that includes unconscious impulsive thoughts. The brain stem (basal ganglia) controls our instinctive behavior. This includes "fight or flight", desire for pleasure, territorialism, breeding, and the selection of leaders (go figure!). The limbic system, controlling emotions and feelings, guides us towards self preservation. Sometimes regretfully, we have no control over the two lower brain parts. They are not connected to the "upper brain". If we sense danger, the less developed parts of the brain kick in and we run like hell (so to speak). It doesn't matter if it really is a threat, as long as we perceive it to be a danger, we react first and think about it later. It is that powerful!
So how does this relate to the stock market? Well, do to the lower brain areas, we want to align our knowledge and feelings with those of the "group" (of peers) and be accepted, whether it be a church congregation or investors in the stock market. Rational thinking goes out the window! We want to know the latest and the best so we hire a stock analyst, who consults with the Wall Street group who consult with each other on "what's hot and what's not". So "the herd" must know more
than we do so we'll follow the herd.
Let's see if I can demonstrate this.
Here's a group of charts. Look carefully and compare them:
Dow Jones Industrial Average:
S&P 500 Index
Nasdaq 100 Index
Each index represents the average of a number of stocks. The Dow - 30 stocks. The S&P 500 Average obviously is 500 stocks, and the Nasdaq 100 is the average of 100 stocks. The period of these charts is from February 2016 until now. Don't tell me they don't look VERY similar!
So how do these averages, made up of different stocks look so much the same? If it was a "Random Walk", the averages would be all over the place, haphazardly! But they're not! I can even pull out a single stock from one of the averages:
Caterpillar (from the Dow) - CAT:
If this doesn't mirror the indexes, I'll eat my hat! Now not all the stocks look like the indexes. But I hope you get my point. There must be a reason for almost identical chart patterns.
So if "the herd" is buying and selling stocks on a daily basis, WHY are they buying and selling them? Well, you could say, some are buying Caterpillar because their stock broker told them it was a "buy" recommendation. Or some sold their CAT stock to buy a new car. There obviously are numerous reasons to buy and sell. But if we are talking about an average of 5,000,000 (five million!) shares of just CAT being bought and sold a day, we need to look at the aggregate reasons for buying and selling, and that is "doing what everyone else is doing" called herd mentality! And because herd mentality is being done subconsciously, buyers and sellers don't realize they are doing it! This is occurring in all actively traded markets including the precious metals (gold and silver), the grains (wheat and corn), bonds, and world currencies!
Although this is VERY interesting, why am I sharing this with you? The good news is that once a subconscious behavior is recognized AND ACCEPTED AS SUCH, the conscious brain can take over and can overcome the desire to herd and MAKE CONSCIOUS DECISIONS based on information available to all. So whether you are a lemming or a sheep, having this knowledge can save you money in the long run!
So what is the "right information"? Let me give you an example. One major reason investors sell their stocks is due to panic or fear. This "feeling" makes them do it. You've heard of the idiom "Buy low and sell high"? Making investing decisions based on emotions makes the opposite happen. In a bull market, greed, another emotion tells you to hang on and make more money at the top. So they don't sell but buy more! And at the bottom, fear sets in and they sell. So they buy at the top and sell at the bottom. Sound familiar? But suppose an investor is aware that these feelings are a reaction to what everyone else is doing (buying or selling their stocks) and says, I'm going to do the opposite! That is VERY difficult as you can imagine! But who do you think is buying the stocks the average investor is selling at the bottom and selling the stocks the investor is selling at the bottom? We call these people the pros or "smart money".
So now that you are consciously aware of how money is made or lost in the stock market (or any other market), you have the option of participating by buying stocks AT THE BOTTOM and SELLING AT THE TOP, which goes against the crowd, a most difficult thing to do, or you can elect to NOT PARTICIPATE and keep your money safe especially during this bear market that will not end until the smart money starts buying again.
I believe this is the first of really important posts I will be writing that are not only fascinating, continuing to explain how markets work and what makes society "tick" but useful information to help keep your money in your pocket and keep you safe.
Until next time.
Best regards,
Ken Knight
Monday, August 15, 2016
By Ken Knight, MBA
In my previous blog, I discussed the implications that social mood has over social trends and activities. Let's discuss some more:
Marijuana:
The most common reason for being arrested in the United States today is for drug possession (Robert Folsom). The average number of arrests per day in the U.S. is 1700! This does not include drug selling which is categorized differently by FBI statistics. The increase of usage of marijuana now stands at 13% of Americans! And this has doubled in the last 3 years!
If we go back in history, we find that prohibitions occur during bull markets and are repealed in bear markets. The prohibition of alcohol occurred in 1919 (the 18th amendment). This was during one of the biggest bull markets in history at that time. The repeal of prohibition occurred in 1932 after a dismal failure of enforcement. Social pressure brought on both movements depending on the current social mood. These changes occurred from "the ground up", in other words, social pressure on the government to make these changes occurred.
Marijuana (mj) is in the same boat. The social pressure surrounding the ban on marijuana came during bull markets and we are seeing the opposite during this momentous bear market. Again the changes in law have occurred due to social pressure from the citizenry. Ironically, the recent "bear market bounce" has caused the federal government to deny any changes in the categorization of mj from a class three drug to a lesser one. My take on the increased use of mj and the decriminalization or legalization of usage is that this is a "feel good" drug that is utilized during periods of negative mood, just as alcohol was (and is) desired by society. A number of states have referendums to legalize the recreational and medical use of mj and I expect to see this trend increase in the future.
Number of births.
Interestingly, when society is in a slump, sex (and therefore procreation) take a back seat. In an economic slump, you are more worried about putting food on the table and a roof over your head. Kinda puts a dent in the libido. Here's a chart of births and the stock market (Socionomics):
Disease epidemics.
There is a direct correlation between the downturn in the stock market (the economy) and societal diseases.(Exploring Socionomic Causality of Social Health and Epidemics)
Let's name a few:
Cholera:
Ebola Epidemic:
A six year decline in Western Africa’s regional benchmark stock index preceded the eruption of an Ebola epidemic in 2014. The epidemic has killed over 11,000 people in West Africa.
Zika Virus:
Finally, after a 5 year decline in the Brazilian Stock Market, we now see the Zika virus becoming the latest epidemic outbreak.
I just read that in the next 3 years, 25% of the inhabitants of Puerto Rico will have the Zika Virus!
What conclusions can we make of this? First of all, when there is a negative societal mood, there is more poverty and a decrease in public health resources available. Alos, a whole lot of stress is put upon us as a whole. Increased stress puts stress on our immune system decreasing our ability to fight infection. There is also an increased amount of poverty (as in Rio Dejunero) and, as we are seeing in the reaction of our own government, there are a decreased amount of resources made available to put towards public health to fight an epidemic.
As to recommendations, as society enters a period of heightened stress, we as individuals can try and protect ourselves by understanding what is happening and not to "stress out" to maintain a strong immune system (Alan Hall). Remain clear of areas where there is high risk. As for using alcohol and drugs to help with mood, I leave that to your own discretion! Mediation and surrounding yourself with positive people will help even better.
We'll talk of other ramifications of society's mood in future blogs.
Until then.
Best regards,
Ken Knight
Thursday, August 4, 2016
By Ken Knight, MBA
No doubt you are hearing many news stories that reinforce my assertion that, long term, we are mostly in a "bad mood" swing . As nothing goes straight up or straight down, we are in a "bear market bounce". It is interesting and educational to look at how we are influenced on so many levels because of this principle. We are able to look back and possibly look forward to social trends that influence our tastes in fashions, what music we like, and what represents a good movie we'd like to watch, to name a few I will be discussing.
Let's look at some:
Fashions:
Have you ever heard of the "Hemline Index"? Back in the 1920s, the economist George Taylor conceived the hemline index that says the skirt hemline is correlated with the economy (and thus stock market prices). "In times of decline, the hemline moves towards the floor (decreases), and when the economy is booming, skirts get shorter..."(The Big Picture). If we go back in history we see that this is pretty much substantiated.
1920's
1930's Depression:
1940s War Style Joan Fontaine and Olivia De Havilland –
1950's Starting to come up!
1960's
Wow!
1970's
1980's
1990's
Kind of a mixed bag. Confusing fashion like the period.
2000's again confusing.
2015, they're coming down again.
There ya go!
Okay. How about music.
I'll give you the music and you tell me the mood:
"The Charleston" 1927
"Stormy Weather" by Ethel Waters 1933
"She loves You" Beatles 1964
1931 - 1933
The Mummy
Dr. Jekyll and Mr. Hyde
Frankenstein
Dracula
King Kong
1960's
Halloween
Night of the Living Dead
Texas Chainsaw Massacre
Horror movies during bull markets are derivative, comical, hokey, and silly.
1948:
Abbott and Costello meet Frankenstein.
Heroism, adventure family fare and fantasy are mainstays of a bull market. In 1937, Disney released Snow White and the Seven Dwarfs, during a roaring bull market.
1960's bear market? No Disney movies!
During the 1970's bear market, The Texas Chainsaw Massacre was made along with The Exorcist, The Omen, and Halloween.
In the 1980's Disney produced The Little Mermaid, Beauty and the Beast, Honey I shrunk the kids, among others.
The 1990's continued the upbeat theme with The Lion King, Aladdin, and of course, Toy Story!
As we approach the late 2000's into 2010's, movies have gotten darker:
Shutter Island, Pacific Rim, Zombie Diaries, Abraham Lincoln: Vampire Hunter (really!), The Cabin in the Woods, and Sinister. Even comebacks of previous bear markets make a return: Dawn of the Planet of the Apes and Jurassic World made their day-view.
Lately we've had a mixed bag of movies. I believe this is due to the "bear market bounce" we are experiencing that has a somewhat positive mood with undercurrents of negative mood:
Negative:
The Revenant
The Hunger Games - Mockingjay
Terminator Genisys
But on the Positive side:
The Good Dinosaur
Minions
Ted 2
I expect that as we continue to change our mood swing lower after the bounce is done, the number of dark movies will far outweigh the happy ones!
As I have mentioned, there are many aspects of society's trends based on mood swings. Here's some things to think about until next time.
What do you suppose happens in bull and bear markets?
The design (shape) of automobiles.
Legalization of marijuana.
Baseball and basketball ticket sales.
Pro wrestling attendance statistics.
Number of births.
Number of Nuclear explosions.
Fitness and health
Religious participation.
Disease epidemics.
I'll review these in a later blog. Again, fascinating stuff!
Until next time.
Best regards,
Ken Knight
No doubt you are hearing many news stories that reinforce my assertion that, long term, we are mostly in a "bad mood" swing . As nothing goes straight up or straight down, we are in a "bear market bounce". It is interesting and educational to look at how we are influenced on so many levels because of this principle. We are able to look back and possibly look forward to social trends that influence our tastes in fashions, what music we like, and what represents a good movie we'd like to watch, to name a few I will be discussing.
Let's look at some:
Fashions:
Have you ever heard of the "Hemline Index"? Back in the 1920s, the economist George Taylor conceived the hemline index that says the skirt hemline is correlated with the economy (and thus stock market prices). "In times of decline, the hemline moves towards the floor (decreases), and when the economy is booming, skirts get shorter..."(The Big Picture). If we go back in history we see that this is pretty much substantiated.
1920's
1930's Depression:
1940s War Style Joan Fontaine and Olivia De Havilland –
1950's Starting to come up!
Wow!
1970's
Kind of a mixed bag. Confusing fashion like the period.
2000's again confusing.
Okay. How about music.
I'll give you the music and you tell me the mood:
"The Charleston" 1927
"Stormy Weather" by Ethel Waters 1933
"She loves You" Beatles 1964
"No More Mr. Nice Guy" Alice Cooper 1973
"Wild Side" Mötley Crüe 1980
"Like a Prayer" - Madonna 1990
"All I want to do (Is Have Some Fun)" Cheryl Crow 1995
My research for our current time period is all over the place, from "Toxicity" System of Down (Nu Metal) 2005
to
"Me Too" Meghan Trainer (Nu Bubble Gum?) 2012
Get it?
Okay next:
Movies:There is a mixture of all types of movies during time periods. But mix, frequency and popularity are mainly influenced by mood:1931 - 1933
The Mummy
Dr. Jekyll and Mr. Hyde
Frankenstein
Dracula
King Kong
1960's
Halloween
Night of the Living Dead
Texas Chainsaw Massacre
Horror movies during bull markets are derivative, comical, hokey, and silly.
1948:
Abbott and Costello meet Frankenstein.
Heroism, adventure family fare and fantasy are mainstays of a bull market. In 1937, Disney released Snow White and the Seven Dwarfs, during a roaring bull market.
1960's bear market? No Disney movies!
During the 1970's bear market, The Texas Chainsaw Massacre was made along with The Exorcist, The Omen, and Halloween.
In the 1980's Disney produced The Little Mermaid, Beauty and the Beast, Honey I shrunk the kids, among others.
The 1990's continued the upbeat theme with The Lion King, Aladdin, and of course, Toy Story!
As we approach the late 2000's into 2010's, movies have gotten darker:
Shutter Island, Pacific Rim, Zombie Diaries, Abraham Lincoln: Vampire Hunter (really!), The Cabin in the Woods, and Sinister. Even comebacks of previous bear markets make a return: Dawn of the Planet of the Apes and Jurassic World made their day-view.
Lately we've had a mixed bag of movies. I believe this is due to the "bear market bounce" we are experiencing that has a somewhat positive mood with undercurrents of negative mood:
Negative:
The Revenant
The Hunger Games - Mockingjay
Terminator Genisys
But on the Positive side:
The Good Dinosaur
Minions
Ted 2
I expect that as we continue to change our mood swing lower after the bounce is done, the number of dark movies will far outweigh the happy ones!
As I have mentioned, there are many aspects of society's trends based on mood swings. Here's some things to think about until next time.
What do you suppose happens in bull and bear markets?
The design (shape) of automobiles.
Legalization of marijuana.
Baseball and basketball ticket sales.
Pro wrestling attendance statistics.
Number of births.
Number of Nuclear explosions.
Fitness and health
Religious participation.
Disease epidemics.
I'll review these in a later blog. Again, fascinating stuff!
Until next time.
Best regards,
Ken Knight
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