|This essay by Mark Galasiewski originally appeared in
The Elliott Wave Theorist in January 2007
As observers of investor sentiment, we have noted that the period from 1987 to early 1995 generated a severe pessimism. It resulted from a Primary degree correction and then by a sequence of first and second waves, where pessimism often maintains despite a net rise in stock prices. Sentiment at the end of second waves often exceeds that seen at the beginning of first waves (see Elliott Wave Principle, pp. 79-80).
The other three graphs in Figure 1 show the high degrees of pessimism that recurred during the period. Mutual fund managers on average held as much as 12.9% of their portfolios in cash by 1990. Short positions in S&P 500 futures contracts held by small traders ballooned through 1994. And bearish advisors polled by Investors Intelligence far exceeded bullish advisors through most of 1988, 1990, and 1994-95.
The following study evidences negative mood manifestations during the 1987-95 period, fitting investor sentiment indicators even though the stock market was drifting higher.
The investor Carl Icahn once said, “The fastest way to become a millionaire is to invest in the airline industry as a billionaire.” Henry Hardevelt, an analyst at Forrester Research, added, “The U.S. airline industry makes NHL hockey matches look like fifth-grade recess. It’s brutal and bloody. The sad truth is an investor could get a better return starting a Subway sandwich shop than an airline.” And they were just talking about the financial side of the business. We’re going to look at the physical side.
The social and economic contractions that take place during bear markets are particularly hard on the people who fly, maintain, and guide airplanes. They are forced to accomplish more with less time and resources in an already highly competitive industry. We postulated that a negative social mood—held by passengers, crew, maintenance workers and pilots alike—would tend to increase the chances for aircraft accidents and that a positive social mood would decrease them. Indeed that is the case.
Figure 2 shows an inverted graph of the annual number of U.S. general aviation accidents per 100,000 flight hours along with the Dow Jones Industrial Average for the past 30 years. It shows that as the Dow has risen, aircraft safety has generally increased, while setbacks have occurred late in periods of declining social mood. The correlation (R) of the accident data to the log of annual closes in the DJIA is -91%, with a p-value of 10-12, which means that the probability of obtaining such a high correlation is extremely small, making this result highly statistically significant. When using detrended data, we observe no correlation (R = 0.47%, p = 0.98).
There are no comprehensive data available prior to 1975, so this series may be too short to allow us to draw a conclusion just yet. But the surges in the number of accidents leading up to 1982 and 1994 are conspicuous, since they confirm the extremes registered by stock market sentiment indicators in those years. If the negative social mood at those times is responsible for those “air pockets,” then future bear markets should produce similar spikes in the number of aircraft accidents. We will return to this study at a future date.■
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Most economists, historians and sociologists
presume that events determine society’s mood. But socionomics hypothesizes
the opposite: that social mood regulates the character of social events. The
events of history—such as investment booms and busts, political events,
macroeconomic trends and even peace and war—are the products of a naturally
occurring pattern of social-mood fluctuation. Such events, therefore, are not
randomly distributed, as is commonly believed, but are in fact probabilistically
predictable. Socionomics also posits that the stock market is the best available
meter of a society’s aggregate mood, that news is irrelevant to social
mood, and that financial and economic decision-making are fundamentally different
in that financial decisions are motivated by the herding impulse while economic
choices are guided by supply and demand. For more information about socionomic
theory, see (1) the text, The
Wave Principle of Human Social Behavior © 1999, by Robert Prechter;
(2) the introductory documentary History's
Hidden Engine; (3) the video Toward
a New Science of Social Prediction, Prechter’s 2004 speech before
the London School of Economics in which he presents evidence to support his
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