Mood – The Psychologicals

The Generic Sentiment Lifecycle

The relationship between price and sentiment changes during different phases of the market. These generic price/sentiment correlations provide a guide to the next move of the market.

Market Semiotics Sentiment Principles

1. Sentiment Divergence occurs at market extremes
2. Trends begin with Sentiment Impulses
3. The next series of Sentiment Divergences signals trend maturity
4. Then the Sentiment process begins again or recycles

The Market has Distinct Psychological Phases

The Semiotics Stages of a Bear Market graph is not a 'price' forecast. Too many people assume that price levels can be predicted. Valuations, as identified by price levels or PE ratios, are always relative. The most important thing is to understand the psychological phase of the market. The fixation on price levels is a typical cognitive error known as anchoring. It may be more useful to stop obsessing on price levels, and focus on where a market is in its psychological process. The goal of Behavioral Finance strategy is to develop practical models of irrationality, such as the Semiotics Stages of a Bear Market. Below is a 'psychological phase' forecast which we had shown on CNBC and USA Today just after the 9/2001 market low.