HERD MENTALITY
This past summer I filmed this video (below) in Germany in the Englischer Gartens where a flock of sheep were grazing. What was distinct was that the sheep were grazing entirely on one side of the road and the grass was wearing thin as they moved ever closer to the edge of the road. The grass was noticeably more green and plentiful on the other side, however, none of the sheep ventured over. Eventually, one sheep (for whatever reason) had the bright idea of crossing the road and moving into uncharted territory. Then a few more followed. Then more. And before I knew it the entire flock was surrounding me. Within minutes there were hundreds of sheep running across the road in unison to the other side.
It was fascinating to watch this herd mentality in real-time as it closely resembles what we often see in human behavior and specifically markets. The smart money makes a wise move, more investors follow, enthusiasm ensues, the public pours in, greed trumps fear and before you know it there is a severe disequilibrium and ultimately a collapse. What you don’t see in the video is the culmination. I had to move because I was quite literally afraid I was going to be trampled by sheep, but what happened seconds after this video ended was like a bubble bursting in a marketplace.
Apparently, the sheep weren’t supposed to venture across the road. Out of nowhere an Australian Sheep dog came running around from the side of the herd like a bolt of lightning and corralled the herd back into its rightful place. Sheer panic broke out (from yours truly as well as I thought a wolf was running after me) as the steady stream of sheep moving across the road turned into a mass rush for the exit as the entire flock quickly shuffled back onto the other side of the road. After a brief panic all was set right in the universe and equilibrium was restored….
You think we’re that different from sheep? Think again.
Another similarity is that sheep can communicate information about this uncharted territory with a few “Baas”. In the human case we have CNBC and investment banks etc producing volumes of ‘analysis’ that later turns out to contain the human informational equivalent of “Baa”.
We appear to be at the “return to normal” rather than “return to the mean” because the fear, capitulation, despair are not here. As Prechter would say, this feels like the wave 2 high.
Conclusion: Bernanke is a sheep dog
Filming sheep TPC? What, the grass wasn’t growing fast enough? Couldn’t find any paint drying?
TPC – you annotate a conceptual stock chart “are we here”, or “are we here”, creating a profound question? Well, if one can not answer that question, or does not have a strong point of view, then how can one invest at this potentially dangerous time?
What is your opinion, and a little “why”? I know you are bearish short term, but that is a different question than the more profound question raised by your framework.
I’ve chimed in on this chart before. I was just recycling it. I think the panic phase is over. Now we’re in the “workout” phase. Take that “return to mean” line and drag it straight for at least a few years….
http://pragcap.com/where-are-we-in-the-bubble-process
I agree. We are not going to test 666 again. Ben would buy SPY futures if we test 850, and even w/o Ben I think it is unlikely.
ben is the sheep dogs owner….bob doll is the sheep dog.
whole lotta shoes left to fall.
i have seen no capitulation let alone dispair.
EU and their currency/social fiasco drags us there……they might be just fifty years too early with it, or then again……a hundred or never.
TPC. I’m surprised you stopped short on this article. Is it too volatile to weigh in on, or are you just trying to keep the east coast up at night, so you have company?
Also, if we are at “return to normal”, should the mean line be a little higher? It’s a little frightening to think it’s NOT skewed to the low end of the graph.
“i have seen no capitulation let alone dispair.”
—
March 5, 2009.
The sentiment charts show the Institutional Investors are FOLLOWING the Public sentiment higher – NOT leading the Public!
So…are the Institutional Investors the greater fools?
Yes Old Timer in my opinion you’re on to something. Everyone here seems to think that watching what the ‘public’ does, since they always, or at least so the theory goes, have to be the last ones to buy, that when they all turn bullish this will give them that great sell signal. My guess is if they’re looking for the greater fool, and in doing so they’re watching the public, they’re probably looking behind the wrong door.
TPC,
That’s why my eyebrows get raised on a heavy short position here. Equity outflows from mutual funds, the retail investor a/k/a THE SHEEP, have been negative for 24 months straight I believe.
Until we see some mutual fund inflows in a sustained pattern, I don’t think many have crossed the road yet.
When that starts to happen, then I think we’ll be ready for a significant pullback, but of course we will be at much higher levels.
IMHO. I’m watching the yearly close like a hawk, depends on where we are then and then I’ll reevaluate.
TPC,
Was the Girls Gone Wild film crew with you for this shoot?
We would have believed your story even if you hadn’t have had the clip.
~~Only teasing of course. You do great work here and it’s well appreciated!~~
Girls Gone Wild? I’ve never heard of such a thing.
The only problem with this analogy is our sheep dog (FED) is pushing the sheep to cross the road into risky assets (commodities and stocks). Ideally the sheep dog wants them to go into real estate, but good luck with that when no one is sure who actually owns foreclosures and the backlog of distressed properties has created huge supply.
I think this bubble is is still in the awareness phase (to me this is just a bear trap during the commodity run). The governments are going to bailout the Europeans bankers. (that is their function, right…support private banks at all costs) The FED continues pushing investors into risky assets until something breaks…maybe they get the message when people in third world countries starve, but most likely it will be oil. When oil goes exponential ala 2008 the rest of the non-financial S&P 500 companies will tell the FED to shut er down…and yes the fall will be epic if they actually raise interest rates enough the carry traders have to cover.
The real fun starts when the sheep dog realizes the
The analogy is missing the wolves and slaughter houses.
GDP is in contraction w/o the massive gov’t spend (stimulus), with the deficit exploding into the $T and remaining for as far as the eye can see is papering over the GDP contraction.
Private debt to GDP was on a parabolic trajectory (like the chart). Without the artificial GDP expansion from the excess stimulus then the debt to GDP would be on the upswing (like the chart -”return to normal”).
In order to get through the blow off phase the private debt has to return to the mean, which means delevering the private debt, lots of losses still to be recognized by the banks that are enabled by the FED/Treasury to hide them right now. With the total disdain for any future bailouts the new FinReg resolution provisions will need to be exercised.
Hey, herding, herding, herding… Same story for years. So what is the solution? Not many people can time the tipping point. So why not join the crowd? You won’t be criticized for joining the crowed. If you lose, hey, look others are losing too. As long as we have the current ill-incentivized investment system, we will see many more manias.
It makes good sense for sheep to herd together, as it provides them with safety in numbers. A lone sheep is more likely to be vulnerable to a predator, whereas a sheep in a herd can at least hope that there is a weaker member who will bear the brunt of an attack.
Of course, there is no similar benefit for investors to herd together. In a downdraft, everyone who hangs on gets burned together.
The problem reflected in the chart is that retail investors want so much confirmation prior to buying that they wait until it’s too late. Ironically, it’s their quest for certainty that causes them to buy high and sell low; risk adverse behaviors **increase** risk. There is a reason why traders buy on rumors and sell on news, while retail does the opposite…
Take “Fear, Capitulation and Despair” and squeeze it between “denial” and “bull trap”. Then relabel “Fear, Capitulation and Despair”….”Fear Redux, Capitulation II and Ongoing Despair.” Follow with “lather, rinse repeat.”
Although I believe that we saw the top of the market last week, and don’t think we will retest that high again this year, I still don’t think we have a huge 10% drop off the high this year. I don’t know about the rest of you guys, but I’ve been very short term this year sticking mostly with intraday scalps. I’ve only got about 20% of my portfolio in overnight positions because I’d rather the market go up without me than gap down 5% with me.
The thing about trying to read that chart is that it’s too long term, and we won’t have an answer to “are we up here or are we down here” until long after the dust settles.
I fear you might be right. I am sitting on some decent gains in various trades and tempted to just pack it in for the year….Wouldn’t be shocked if we closed the year right in the 1200 range…..
I often read this site but have never posted before. I’m compelled to now because nottpc’s comment made me laugh out loud for real.