|By Chuck Thompson, originally published in the October 2011 Socionomist|
In 2004, Robert Prechter and Pete Kendall wrote an article for Barron’s in which they argued that all investment markets had begun moving together rather than contra-cyclically as they had in the past. “All the same market?” they wrote. “In rare alignment, stocks and junk bonds have rallied with real estate, foreign currencies, gold, silver and commodities. … Liquidity is everything now, and it is driving the prices of all investment classes. These markets have been going up together, and we think that when liquidity contracts, they will go down together.”1
Last month, an article in The Huffington Post observed that “[m]ore than ever on record, individual stocks in the Standard & Poor’s 500 Index are moving in unision.” The article’s author, William Alden, pointed to a measurement known as the correlation coefficient, in which a reading of 1 means that stocks are moving in perfect tandem with an index. Alden said that in September, the correlation coefficient was 0.84, which broke the record of 0.83 set on October 19, 1987—commonly known as “Black Monday,” when the Dow Jones Industrial Average “erased $500 billion of its value in the index’s largest single-day percentage drop ever.” Alden also cited MIT professor Andrew Lo, who stated, “It’s not just stocks. It’s actually all asset classes. The U.S. dollar relative to other currencies, gold, oil and hedge fund returns have now all become very highly correlated.”2
In the June 2006 Theorist, Prechter said that in 2004, people dismissed the concept of “all the same market” as crazy, since markets would have to be crazy to move all together. His response:
… markets are crazy, and predicting such events requires understanding that markets are impulsive and patterned, not rational, and that they go through similar expressions of the same cycle of psychology over and over. The extent and duration vary, but the essence is always the same. The flip side of markets going up together is that when the reversal comes they all go down together.1
Prechter featured an update on “All the Same Market” in the September 2011 issue of the Theorist, in which he also noted a correlation between commodities and stocks. “Despite the clear positive correlation among most financial markets, bears on the economy and the monetary outlook still advocate owning commodities,” he wrote. “But commodities will not save investors’ portfolios. If stocks are going to fall, then commodities will go down, too.”3
As it happens, in 2011 the Dow Jones Industrial Average and the CRB Commodity Index made daily closing and intraday highs for their two-year rallies on exactly the same days: April 29 and May 2.■
1Prechter, R., & Kendall, P. (2004, May 17). In synch to sink: Liquidity matters: A contrarian view on inflation’s prospects. Barron’s, p. 44.
2Alden, W. (2011, September 24). Stock correlation reaches record as traders fear grim economy. The Huffington Post, Retrieved from http://www.huffingtonpost.com/2011/08/24/stocks-correlation-sp500_n_935539.html.
3Prechter, R. (2011, September). Still all the same market. The Elliott Wave Theorist.
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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
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