|By Chuck Thompson
Originally published in the March 2012 Socionomist
Despite warning systems, firewalls, contingency plans and safety nets, unforeseen events still rock our world—and our personal lives. We could all benefit from a little more insight regarding the future, but is such a thing possible? Dr. Cari Bourette, who teaches university courses in sustainability and is director of global risk assessment for A New Story Foundation, believes it is.
For years, Elliott Wave International has posited that endogenously regulated social mood determines the character of social events. Dr. Bourette and her team of researchers are using oscillations in social mood in their attempt to forecast socioeconomic, geopolitical and natural events around the world.
Dr. Bourette’s Approach
Dr. Bourette’s goal is to use science to quantify and reintroduce our recognition of natural signals into modern life. She discovered the work of Robert Prechter in 2006. “When we learned from Prechter’s work that there is a clear relationship between social mood and the markets,” she says, “it seemed to us that if we could model the future market movement from our projected social mood factors, we might be able to use it also to forecast potential impacts to socioeconomic and geopolitical stability.”
In September 2008, Dr. Bourette and her team saw signs of potential impact to socioeconomic stability around the world and predicted “The Great Market Crash of 2008” would be “unlike any stock market decline in recent history.” In November 2011, she and her team saw signs of geopolitical instability coming to the Persian Gulf region. The following month, Iran captured a U.S. drone and began 10 days of military naval exercises.
Forecasting the Markets
Dr. Bourette and her team also have attempted to forecast ongoing changes in the stock market using a “Market Mood Model” to ascertain four oscillating mood factors. Between July 2007 and June 2010, the model generated daily signals.
Between September 1 and October 27, 2011, the team added to their model information derived from daily most-popular Internet searches. The study assessed the top five searches occurring each morning at 9 am Eastern Time, before Wall Street’s opening bell. Dr. Bourette and her team scored those searches using a research tool that she calls the “Compass System.” She notes that the team did not score the words themselves in the top searches, as is the case with many other systems that attempt to gauge mood. Instead, they performed a qualitative assessment of the news stories associated with those searches to ascertain the mood the stories and, by extension, the searches represented.
Dr. Bourette and her team computed a three-day moving average for the scores, which in turn served as the input to the Market Mood Model. They gathered the moving averages for all non-market days (for example, weekends and holidays) and averaged them together with the first trading day’s moving average in order to accommodate the cumulative effects, if any, of the weekend’s mood configurations on the next trading day. The Model took four normalized scores as inputs. Its output or signal was a scalar that reflected the expected change in the S&P 500 for the day.
“Effectiveness of the model was evaluated by viewing theoretical profit or loss as a ‘paper trade,’ and by evaluating the correlation between the generated model signal with the daily stock market movement,” Dr. Bourette wrote. “For the ‘paper trade,’ profit or loss was determined by the number of S&P points hypothetically gained or lost by following the model vs. how many points the S&P gained or lost that day.”
In her December 27, 2011 paper, “Daily Stock Market Expectations from Oscillating Social Mood Factors,” Dr. Bourette reported a “significant relationship between Internet search trends and daily stock market movement (p<0.032).” She noted that this implies a “relationship between the societal focus of the moment (i.e., social mood) and the relative health of the stock market.” During the period of 40 trading days, the model earned a profit of 266.7 S&P points. Sixty percent of trades (24 out of 40) were successful. “This implies that top Internet search trends (via the Market Mood Model) and daily stock market movement are likely related,” Dr. Bourette wrote.■
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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
socionomic hypothesis; and (4) the Socionomics Institute’s website, www.socionomics.net.
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