By Cory Mitchell, CMT
Here is a relevant questions all traders (and really any human being) should ask, but likely never have: Does News Create Social Mood, Or Does Social Mood Create the News?
This may sound like a philosophical question which has nothing to do with trading, but it actually has everything to do with trading. News is often attributed to market moves, and Social Mood (often called “sentiment”)–which is gauged by a number of factors–is often interpreted in light of recent news headlines.
But what creates news? This is a not a chicken-or-the-egg question, because there actually is an answer according to a new field of study called socionomics.
News is commonly perceived as what drives us, as what changes our ideas and beliefs and ultimately what causes the world’s financial markets to move. While it is a nice theory, it ultimately is untrue, at least according to some socionomic theories.
The news headlines are the product of social mood, as opposed to creating social mood. In other words, news may be correlated to actual world events, but it does not cause them. Some may argue that with rapid information exchange traders can react quicker and thus buy or sell on news. This type of thinking would mean the news has a cause-effect relation on the markets. While on the surface this may appear true, it doesn’t hold up.
Markets have always been bought and sold, in a constant gyrating motion–three steps forward, two steps back. Therefore, news cannot be the cause of this phenomenon. Social mood is what drives markets, not news, as social mood is what drives the news as well.
News simply provides information which news-producers feel will be relevant, and what is relevant depends on social mood and social acceptance. In other words, news is a reflection of a social mood…what is already going on…as opposed to a precursor to social mood.
Most technical traders are aware that bad news means nothing in an uptrend, and good news means nothing in a downtrend. News doesn’t matter, social mood matters because social mood is what causes people to buy and sell things. Consider a shirt you threw out, and the new one(s) you bought because the old one was no longer fashionable and the new one(s) is part of the social trend. Or the new color paint you bought to get rid of the “tacky” 80’s coloring in your home. That is social mood…it feels like we are making a decision on our own, but social mood (each social circle will vary) shapes our desires and ultimately what we buy, sell and value.
While the amount and type of news (along with fashion trends, music trends and tv shows for example) can be used to gauge social mood, social mood is the basic underlying factor created by environmental and evolutionary forces…which could also be called History’s Hidden Engine.
These ideas, which are not new, but have lacked study, are now being progressed by the field of socionomics. Leading the field in socionomic study is http://www.socionomics.net/. A totally free resource, for understanding and advancing the social sciences…and much of that work is related to financial markets as the markets are the ultimate tool for gaining insight into social mood and how that mood affects prices.
A fantastic introduction to this field is a 59 minute video (can be paused so it doesn’t need to be viewed all at once) called History’s Hidden Engine, produced by socionomics.net.
Histories Hidden Engine video: http://www.socionomics.net/hhe-part-1/
Needless to say not everyone agrees with the assertions made in the video, or what I have discussed above. After watching the video let me know what you think.
One final thought…Bernanke coming out and saying something unexpected may cause the market to decline/rise quickly, but the question we need to be asking is would it have happened anyway if Bernanke had not made the comments? The answer is yes, while the timing might have been a bit different the market would have declined/rose anyway (although maybe not in the steep fashion)…because if people want to buy stocks they buy stocks regardless of news, and if they want to sell they sell. Social mood determines whether people want to buy or sell…not news.
Or so this theory asserts. Aspects of statistics also back this idea (see my Probabilities articles on the Trading Tutorials page).
Cory Mitchell, CMT
P.S. Just yesterday I received in the mail my book box-set: Socionomics: The Science of History and Social Prediction which included two 400+ page books which look at all different areas and professional fields. I am about 100 pages in to the first book and it is quite fascinating…especially learning about some fields I had never even heard of…or even thought of…before.