by Jason Bodner

December 29, 2020

The wild year of 2020 is almost over. Year-end often means strange-acting markets because liquidity is low, as most people just want to chill out with their families. In “normal” (non-2020) years, many money managers start checking out around December 15th. Pre-Covid, they headed for ski-slopes, tropical beach villas or other lavish vacation spots. Despite this being an obviously non-normal year, the last few days of December 2020 are still not indicative of usual stock-market behavior. That’s why we won’t go over what the Big Money is doing now, because the data is less reliable – as opposed to January, when things rev up again. Instead, I want to discuss a timeless theme – one that is especially essential going into a New Year.

We’re human, with wants, needs, dreams and fears. We laugh, we cry, we love, and we hate. Our full range of emotions are inescapable because we’re emotional beings. Emotions make us both great and awful. Our emotions help create art, literature and music. Emotions fuel love stories – and wars.

Emotions are the foundation of our human experience, but they are technically merely electrochemical responses to our perceptions of the world around us. They also can be viral. This being the year of viral contagions, let’s explore emotional contagions – more importantly how to avoid spreading them in 2021.

We can “catch” emotions, just like a virus, either in a group situation or one-on-one. Evolution tells us that we are social creatures who survive best in groups. Picking up on fear helped us survive thousands of years ago. Picking up on admiration helped us follow wise leaders. One might think evolution can rid us of our reliance on emotions, but despite our technological reliance, we’re still just inherently cave people.

This was proven again in 2014: Facebook and Cornell University conducted a massive experiment on nearly 700,000 people. When they posted negative emotional content in news feeds, users posted more negative messages. The opposite held true, too, so the negative and positive emotions were each viral.

Emotional contagion is real, and we are deeply hard-wired to be receptive to it, even if we don’t realize it.

I found decades ago that I am deeply susceptible. I tried trading on my emotions and got my hat handed to me. When people got bullish, I bought the top. When they got bearish, I sold the bottom. It was a disaster. So, I developed a system to help me conquer emotion by removing it. It did wonders for my investing.

Recently, I was chatting with a few old Wall Street colleagues of mine. Once upon a time, they were either my clients, bosses or employees. These “Streeters” know that emotion is the enemy of investing.

The market is overbought but could stay that way. Therefore, bullishness is excessive, but prices could rise further. Each day the market seems to defy gravity and prices are moon-bound. But invariably a sell-day comes. Something coincidental emerged in our chats. Here are some comments from three of them:

  • One quant-minded guy remarked, “I notice we’re cheery when our portfolio is having a big green day, and decidedly less so when the market is down.”
  • Another guy who has literally made millions in the market boldly said: “I don’t like down days.”
  • A third guy said: “I like to look at my account when it’s in the green.”

Those comments seem so obvious that I thought to myself: “What if I could create an emotion indicator?” Not just a bull vs. bear reading, but something more sophisticated. It had to be accurate, and it had to be quantitative… So, I spent some time, and this is what I came up with, based on years of collective observations and experience. This is what emotion looks like when overlaid against a price chart:

Stock Market Emotion Graph Chart

When we are losing money, we get negative. We feel cheery when we win and grumpy when we lose.

To quote Homer Simpson: “It’s funny because it’s true.”

Multiply that times millions of investors and trillions of dollars, and you get a large cauldron of emotional contagion. When those emotions hit extremes, our internal survival mechanism tells us to act. When markets look fearsome, instinct tells us to sell (protect our stash). When markets are excited, instinct tells us to buy (not miss out), now called the Fear of Missing Out (FOMO) trade.

We now know that these emotional responses can turn into a cruel betrayal. At my research firm, we observed that when emotions get extreme, the opposite action is usually the appropriate on, according to our 30-year history. Just looking at this year’s Big Money Index (BMI), we see emotions in action:

MapSignals Big Money Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Notice when Big Money started to exit stocks in January, emotion was very bullish. It continued until late February. Then the runway ran out of fuel and fell off the cliff. Late March, sentiment was about as low as we could get. Negativity persisted for months, but Big Money started buying right as gloom peaked.

Eventually sentiment turned optimistic again, with signs of non-cataclysmic economic activity, and a new election. Positivity peaked in September, but Big Money exited well before. As sentiment turned negative, look how Big Money started buying as the election results were coming clear. Now we are back to ebullient sentiment – a vaccine is coming, the world will re-open, life will return to normal.

This year’s history alone tells us that we should watch for when Big Money exits, not when people start to feel bearish. Odds are that when they “feel” bearish, we should buy. By the way, it’s not true just this year: I have decades of data of evidence. While it’s not always true, it is mostly true.

Next year will bring opportunity. I urge all investors to resist falling victim to emotional contagion. When everyone is bullish, perhaps we should be cautious. When everyone is bearish, maybe we should be bold.

Warren Buffet figured this out: “Be fearful when others are greedy and greedy when others are fearful.”

Warren Buffett Quote Image

All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

A Look Ahead by Louis Navellier
Apple Moves into Self-Driving Auto Technology

Income Mail by Bryan Perry
Covid-19 Is Shaping Historic Changes

Growth Mail by Gary Alexander
The Pandemic That Saved America

Global Mail by Ivan Martchev
“America!” is Temporarily Closed

Sector Spotlight by Jason Bodner
How to Avoid Spreading “Viral Contagion” in 2021

View Full Archive
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About The Author

Jason Bodner
MARKETMAIL EDITOR FOR SECTOR SPOTLIGHT

Jason Bodner writes Sector Spotlight in the weekly Marketmail publication and has authored several white papers for the company. He is also Co-Founder of Macro Analytics for Professionals which produces proprietary equity accumulation/distribution research for its clients. Previously, Mr. Bodner served as Director of European Equity Derivatives for Cantor Fitzgerald Europe in London, then moved to the role of Head of Equity Derivatives North America for the same company in New York. He also served as S.V.P. Equity Derivatives for Jefferies, LLC. He received a B.S. in business administration in 1996, with honors, from Skidmore College as a member of the Periclean Honors Society. All content of “Sector Spotlight” represents the opinion of Jason Bodner

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Jason Bodner is a co-founder and co-owner of Mapsignals. Mr. Bodner is an independent contractor who is occasionally hired by Navellier & Associates to write an article and or provide opinions for possible use in articles that appear in Navellier & Associates weekly Market Mail. Mr. Bodner is not employed or affiliated with Louis Navellier, Navellier & Associates, Inc., or any other Navellier owned entity. The opinions and statements made here are those of Mr. Bodner and not necessarily those of any other persons or entities. This is not an endorsement, or solicitation or testimonial or investment advice regarding the BMI Index or any statements or recommendations or analysis in the article or the BMI Index or Mapsignals or its products or strategies.

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