“Wonderful as is the development of the human brain, it originated as an enlarged ganglion, and its first response is still that of the ganglion”
So, said George Selden in 1912, in “Psychology Of The Stock Market”.
Apparently, ganglion cells aid in the release of hormones, playing an important role in the instinct to "fight or flight” – and it is this primeval tendency which lies at the heart of lack of investing success.
This instinct allows the optimism error to fuel a bull market until its crazy peak, and the pessimism error then fulfils the same role as the market reverses.
Paul Macrae Montgomery understood this, as one of Wall Street’s rare deep thinkers. Sadly, he died in 2014, age 72, and such a rare breed in the investment community is always greatly missed.
Back in the 1980s, ahead of his time, he highlighted that the markets are not mechanical such that they can be simply observed and analysed via neat mathematical formulae. He understood that confidence drives markets, confidence meaning the mental state of investors at any point in time. The problem was, and remains, that mental states do not remain constant, which is why economists so frequently look stupid.
It is confidence which is the key variable to most outcomes, and economists typically don’t have a way to measure it (if they acknowledge it at all).
Confidence swings around over time, but it can be observed. For example, the enthusiasm for technology stocks with no earnings was extraordinary in 1999. Four years later those same tech companies were worth 80% less (on average) – in some spectacular cases they were worth nothing. What changed was confidence.
What Paul also observed was that the markets appeared to move in distinct cycles. In particular he noted the importance of the Autumn Equinox, which occurs between 21st and 24th of September each year – this year it was Sunday 23rd September. I was reminded of this earlier in September, but it went out of my mind.
Then the S&P 500 topped on Friday 21st
September, the last trading day before the Autumn Equinox. If this was an isolated incident it could pass without comment. But it isn’t. There is a long list of precedents, which you will find in this article in Forbes, just some of which are:
- September 21, 1873, that crash was so bad that the exchange shut
- September 21, 1929, the utility stocks top just before the crash
- September 21, 1931, the British pound was devalued 28% overnight
- This date played a part in the stock market massacres of October 1978, 1979, 1987, and 1989
- September 21, 1985 broad run on currencies (54 years after the pound devaluation)
- September 20, 1992, the French vote on European Exchange Rate Treaty, the pound collapsed a few days prior
- September 23, 1998, the Long Term Capital rescue
- September 15, 2008, filing for Chapter 11 bankruptcy by Lehman Brothers, one week before the equinox date
Paul noted that the only academic support for some phenomenon on this date was from the Yale Medical School Department of Neuroanatomy. They discovered that subtle shifts in human chemistry occur on this date – “measurable perturbations”.
WD Gann (1878-1955) had also noted this timing tendency. Wikipedia says of Gann that his trading methods were based on “
geometry, astronomy and astrology, and ancient mathematics”. He still has many very committed disciples. For those who believe “the answer” must be complex, if not other-worldly, Gann will have appeal. I will stay open-minded – but I do wonder if he was just a great salesman.
Despite the number of precedents, I don’t understand why this occurs, although the Yale research provides some basic clues. Yet it clearly happens with a regularity which is more than coincidence.
Years ago, I recall one investment bank, I think it was Goldman Sachs, letting on that they had an astrology specialist. Of course, they all have technical analysts (i.e. those who analyse trends and patterns and charts rather than company profits) and many produce research on Elliott Wave analysis.
Some of you will have been tempted to look further into Elliott Wave analysis. It is a simple concept at heart. Each of the waves has a personality that makes sense in the context of what we know about how investors behave, in particular highlighting the cycle of optimism which George Seldon wrote about in 1912, and which Paul Macrae Montgomery frequently and engagingly wrote about during his career.
Most Elliott practitioners apply a raft of rules, guidelines, and supplementary analysis. After 30 years I have found it most useful when I keep it relatively simple, as applied in recent teleconferences, and stay prepared to adjust my outlook when actual market moves suggest something else is going on.
Where does that discussion leave you? Probably wanting me to say with 100% certainty that 21st September was a very significant peak. I wish I could – I really do.
What about 21st September? And that Yale paper? It is undoubtedly interesting. But it highlights how we still understand too little about brain function – which in turn limits our ability to find complete solutions to our unhelpful behavioural traits when investing. So…
For now, just get that ganglion under control!
How? Simply return to our/your investment plan, and that part of it, at least in my plan, which says “apply a stop-loss at x% fall from recent peak”.
And lest you or I waver, I remind myself of the Elliott Wave analysis which strongly suggests there is further downside, as highlighted in the last teleconference and updated here