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Social Mood And The Markets

03/04/03 04:34:42 PM PST
by David Penn

"When the mode of the music changes," wrote Plato, "the walls of the city shake."

Sentiment indicators have always been popular ways to measure "the mood of the market," but I've got to wonder. Is any recent increase in the popularity of sentiment indicators attributable to the dramatic shift in market sentiment? Sentiment has shifted from utter euphoria between 1995 and 1999 to, if not despair, then at least apprehension and doubt since 2000. Most sentiment indicators, it should be said, are used in a contrarian fashion. For example, when a sentiment indicator suggests that sentiment is exceptionally high or positive, that signal is used by traders and investors as a reason to become concerned and cautious. Conversely, when a given sentiment indicator points to extreme levels of nervousness and trepidation among traders and investors, those watching the indicators often tend to see undervaluation and opportunity.

Most sentiment indicators take some measure of the actual behavior of buyers and sellers in the marketplace. One popular sentiment indicator, the CBOE volatility index (VIX), measures the implied volatility of eight different options on the Standard & Poor's 100 (OEX). Others, such as Investors Intelligence, represent surveys of bullish versus bearish advisory opinion or, like the stock mutual funds cash/assets ratio, measure the amount of cash held by mutual funds (more cash meaning more bearish sentiment).

But social mood is a less-discussed sentiment indicator based more on the relative optimism and pessimism in society as expressed through various social phenomena — from politics to pop culture. Studying social mood can be a more comprehensive, if occasionally more abstract, way to understand whether, for example, a society is experiencing the requisite confusion, anger, and hopelessness that has historically preceded all major bull markets, including those that began in the late 1930s and late 1970s.

Unlike those sentiment indicators that measure market participation, the concept of social mood suggests it is the relative feeling of optimism and pessimism in the general population that brings about the behavior of buyers and sellers in the marketplace. Moreover, by understanding and looking for the "footprints" of social mood shifts — evidence in anything and everything from women's fashions to attitudes toward religion — long-term speculators and investors can begin to anticipate possible changes in secular trends before they become obvious to the broader public.


Writing in The Wave Principle Of Human Social Behavior, Robert Prechter presents compelling evidence in support of his thesis with regard to social mood, which he refers to as socionomics. Perhaps his most famous example involves the fortunes of horror films during times of secular market downturns and Disney films during times of secular market upswings. While his discussion deserves to be read in its entirety in order to grasp the magnitude of his hypothesis, there are a few excerpts from The Wave Principle that can be noted here:

When would a society be more likely to sport adventurous, frisky fashions as opposed to similar, conservative dress? Colorful clothes, short skirts, and diversity in appearance are typical of social mood peaks. Dull colors, long skirts, and uniforms are common at social mood troughs. When would a society progress toward free trade, and when would it restrict it? In the 1920s bull market, free trade was encouraged. In 1929, at the start of the bear market, Congress passed protectionist tariffs despite widespread knowledge that such policies are destructive.

One of the most controversial aspects of the social mood thesis is the notion that social mood leads changes in other realms of society, including the stock market. While this is an understandable controversy, it has long been considered wisdom among traders that fear begets selling, greed begets buying, and the interplay of fear and greed is the source of price movements and volatility in the markets. What is somewhat novel here is the notion that the emotions of fear and greed themselves do not originate in the marketplace, but are instead born of the broader social environment.

Whether or not we believe the wave principle best articulates this "broader social environment," the concept of social mood or socionomics that flows from it provides investors and traders with another macrolevel tool with which to understand both present market conditions and those yet to come.


One of the easiest ways to perceive social mood is through shifts in popular culture. Among the more widely known examples are the ideas of Ralph Rotnem, a brokerage industry researcher who is credited with develop ing the "hemline theory." The theory suggests the hemlines on women's skirts tend to rise and fall in strong correlation with the Dow Jones Industrial Average (DJIA). Prechter's work on social mood has extended this sort of research — most famously with his example of the popularity of horror movies during market downturns in the 1930s (particularly The Mummy, Frankenstein, Dracula, and King Kong) and the evolution of the "splatter" movie in 1970s (The Texas Chainsaw Massacre, Halloween, and Friday The 13th), compared to the popularity of animated Disney films in the optimistic late 1940s and the 1950s (Peter Pan, Lady And The Tramp, and Sleeping Beauty) and again in the 1990s (The Little Mermaid and The Lion King).

This is in dramatic contrast to the lack of success of the horror movie genre during bull markets (I Was A Teenage Frankenstein, from 1957, is a classic example), as well as the drop in popularity of Disney's animated films during bear markets (The Aristocats in 1970 was typical of Disney's relatively uninspiring animated output in the 1970s). In fact, most of the popular animated Disney films of the 1930s, such as Snow White And The Seven Dwarves and Fantasia, were rereleased in the late 1960s and early 1970s not as charms for a nostalgic generation, but as palliatives for what was perceived to be a drug-fueled culture. As David Koenig noted in his 1997 book, Mouse Under Glass:

Conservative groups began picketing movie theaters for screening Disney's animated "drug fantasies." Hippie-era moviegoers liked to sit in the front row, even on top of each other, smoking pot and offering advice to Mickey. The company asked the theaters to promote the film not as typical Disney fare, but "now you see Fantasia as you did Easy Rider. Hip youngsters come to see it as a special kind of trip."

This points not simply to how good becomes bad and bad becomes good in the transition from positive to negative social mood, but also some of the nuances that take place. Disney films, for example, did not become "bad" films in the eyes of many moviegoers. In some respects, the fact that these films remained popular was a testament to their greatness. The difference is how a change in social mood affects the way otherwise neutral cultural products can be interpreted.

Summing up his thesis in a chapter titled "Popular cultural trends manifest social mood trends," Prechter notes:

The trends in the stock market and such activities as described in this chapter are coincident because they reflect social mood trends directly. As positive mood waxes, many people buy stocks, watch Disney films, prefer music that expresses joy, and bestow their overflowing ecstasy upon pop stars. When the negative mood waxes, many people sell stocks, watch horror movies, prefer music that expresses dissatisfaction, and have little ecstasy to bestow.

While those looking at social mood have looked at a variety of expressions of culture as their barometer, this discussion will conclude with an analysis of the way that police officers are portrayed in popular culture — namely, in the movies and on television (to a somewhat lesser degree). A classic pair of examples includes the TV comedy Car 54, Where Are You? (1961­63) and the film Police Academy (1984). I consider police officers an excellent example for inquiry because it seems to me that in times of positive social mood, police officers are held in a particularly high regard and revered by the average citizen.

Beyond this, positive social moods allow us to spend time making lighthearted fun at the whole notion of law enforcement, with wacky, bumbling cops chasing wacky, bumbling criminals in a landscape in which no one ever gets shot and the bad guys cry when they're arrested. On the other hand, instances of negative social mood tend to produce equally powerful, yet opposite emotions. Police officers are seen as occupying armies in communities that have been especially hard-hit by difficult socioeconomic times, and the portrayal of police officers in popular culture shifts from hero to, if not outright villain, then at least figures of suspicion and cynicism.

Figure 1: "Bad" cops ruled the movies of the 1970s the way comical cops ruled during much of the 1980s. A brief bear market from 1987 to 1992 saw the law enforcement officers treated cynically by Hollywood once again.


It is hard to imagine a more distinct difference in the portrayal of police officers — and the differences in social mood that beget these disparate portrayals — than that between the "cop movies" of the early 1970s and those of the mid-1980s. The early 1970s (as I noted in another piece, "Elliott Waves In C") were a period of significant social turmoil. The war in Vietnam had become a constant sore on the body politic, and the aspirations of the civil rights movement had transmogrified into a black militancy in the form of the Black Panther party — as well as a steadily growing welfare state and the birth of the black "underclass." Inflation was just starting to be seen as a permanent component of contemporary economics. Crime in many parts of the United States had reached epidemic proportions, with fourfold increases in serious crime throughout the 1960s and 1970s. According to the National Center for Policy Analysis, one out of every three households was victimized by crime in the early and mid-1970s. In addition, the romanticism of violence by the so-called New Left in the early 1970s — a movement that included at its margins such domestic terrorist organizations as the Symbionese Liberation Army and the Weathermen — added a tone of fear and uncertainty for which most people, including a law enforcement regime only recently empowered to pursue organized crime and the Mafia (the RICO act, 1970), were particularly unprepared.

This negative social mood created a trio of "cop movies" that are considered classics — even though their themes and moods were especially dark and pessimistic. I'm thinking of the first Clint Eastwood cop movie, Dirty Harry, Gene Hackman's The French Connection, and Al Pacino's Serpico.

Consider these films for a moment. Opening with a solemn tribute to the "fallen police officers of San Francisco," Dirty Harry starred a police officer armed with a gun that looked more like a handheld howitzer than a standard-issue sidearm. Although successful in apprehending a serial killer who was terrorizing the city, the officer is astounded at the way the serial killer is able to manipulate the press into feeling sorry for him (he claims police brutality). Without spoiling the resolution of the conflict, the film ends with "Dirty" Harry Callahan tossing his badge into a trashcan — a symbol of utter contempt for the role of law enforcement.

The French Connection and Serpico are no less bleak. In The French Connection, the two police officers courageously chasing international narcotics dealers end up not only failing to apprehend the mastermind of the smuggling ring, but are also almost completely discredited, their efforts largely written off by their superiors. Serpico, which was based on a true story, is entirely about police corruption, about the story of a brave young police officer who goes undercover to uncover a world in which seemingly every police officer is "on the take."

These films of the early 1970s could not be more different from the "cop movies" of the 1980s — particularly those in the middle of the decade. A representative "cop movie" from this period of positive social mood is Eddie Murphy's Beverly Hills Cop in 1984, a film with a premise that would have been unthinkable 10 years before. Although the subject matter of the film is relatively serious, the fact that the star of the film was a comedian at the height of his popularity was lost on no one. Whereas Clint Eastwood's Dirty Harry Callahan moved through San Francisco like an avenging angel, Eddie Murphy's street-smart Axel Foley jives, jokes, and smart-talks his way through the sunny cityscape of Beverly Hills with comic ease. Every now and then, the audience is reminded that Foley is on the trail of the man who killed his partner (a theme that would become a staple of positive social mood cop movies, as if police officers needed some particularly tragic incentive like the murder of a partner in order to unleash their full crime-fighting prowess). But for the most part, Beverly Hills Cop was about the cleverness of Eddie Murphy, fancy cars, gorgeous mansions, and the beauty of Beverly Hills.


If the preceding has any validity whatsoever — and I believe it does — then we should be able to look at the cop movies of the 21st century for those images and portrayals of police officers that are more in line with the Dirty Harry mode and less in line with the Beverly Hills Cop mode.

I would argue there is another sort of bull market cop, the tough-guy-with-a-heart-of-gold that typified not only the cop leads in movies like Bruce Willis's Die Hard and the Mel Gibson/Danny Glover buddy-cop Lethal Weapon series, but also in popular television depictions such as the long-running Hill Street Blues series that lasted from 1981 to 1987. In such eras, cops break a few of the rules and argue frequently with their superiors, but would only be falsely accused of killing a suspect and would never think of tossing their badge in a wastebasket.

So what has the 21st century brought us so far in the way of cop movies? If Denzel Washington's Training Day (2001) was any indication — a tough-as-nails depiction of a rogue, undercover, narcotics cop through the eyes of a young, up-and-coming recruit — then cop movies may well be in gear with the bear market mood. The fact that Denzel Washington — an attractive leading man who rarely played villain roles before Training Day — played the role of the rogue cop was an interesting-enough development. The fact that he won an Academy Award for doing so is all the more interesting and relevant to this theme. Other popular cop movies since 2000 include similarly dark depictions of the "men in blue," Narc, Deep Blue, and Minority Report being among the more popular. Even Robert DeNiro's City By The Sea has an otherwise noble police officer with a murderer for a father and a son who is slipping deeper into a life of crime.

What will such movies look like when the market — and, more important, the negative social mood — bottoms and begins to reverse? Prechter makes the following point that may serve as a rough guide to the cop movies to come:

I observed years ago, and have often remarked, that the initial deterioration in the stock market during the fourth wave sets the stage for the ultimate reversal. . . . Apparently, this is true across all manifestations of social mood, not just the stock market. For instance, the fourth-wave social-mood correction of one smaller degree immediately preceding the two major bear market periods (1930s and 1970s) gave advance indications of the style of horror that would be produced in the ensuing bear market. In 1920 and 1921, at the bottom of the preceding Cycle degree bear market, Dr. Jekyll and Mr. Hyde with John Barrymore, and Nosferatu, the German vampire film . . . presaged the monster movies of the 1930s and 1940s. In 1962, at the bottom of the preceding Primary degree bear market, Psycho, the famous Hitchcock knife-in-the-shower shocker, presaged the slasher movies of the 1970s.

To clarify some of the Elliott wave jargon, the "arthouse" horror movies of the smaller bear market periods in 1920­21 and 1962 anticipated the "classic" horror movies of the larger bear market periods in the 1930s and 1970s, respectively. Thus, there should be some similarities between the cop movies of the current period and those of the previous "baby" bear market, which is generally regarded to have occurred between 1987 and 1992 — essentially between the crash of Black Monday in 1987 and the electoral defeat of George H.W. Bush in 1992. What sort of cop movie was popular during this time? Here are some of the more popular or controversial cop movies of that 1987­92 era, with their studio-provided taglines where appropriate:

· Robocop (1987) — "Part man. Part machine. All cop. The future of law enforcement."

· Colors (1988) — "70,000 gangmembers. One million guns. Two cops."

· Maniac Cop (1988) — "You have the right to remain silent. Forever."

· Bad Lieutenant (1992) — "Gambler, thief, junkie, killercop."

· Deep Cover (1992) — "There's a thin line between catching a criminal . . . and becoming one."

Finally, it is worth noting that at true bottoms in negative social mood, "the people" themselves often feel called upon to take justice into their own hands. This was certainly the case with the controversial Death Wish in 1974, which featured Charles Bronson as a liberal architect who becomes a death-dealing vigilante in the wake of the rape of his daughter and murder of his wife. In 1993, Warner Brothers released Falling Down, a film in which a similarly mild-mannered, middle-class man is so affected by the negative mood of industry layoffs and rising crime that he goes on what the studio described as a "war with the everyday world." This possibility, that a negative mood extreme might produce striking portrayals of heroic vigilantes, should not be overlooked as we watch to see whether "bad" markets continue to produce images of "bad" cops.

David Penn may be reached at


Koenig, David [1997]. Mouse Under Glass, Bonaventure Press.

Penn, David [2003]. "Elliott Waves In C," Working Money, February 18.

Prechter, Robert [1999]. The Wave Principle of Human Social Behavior, New Classics Library.


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