Two subjects on my mind today. The first is – as usual – some esoteric musings on human nature, but if you are willing to tolerate a little history and philosophy, we will get on to the second – exactly how and when American Blue Chip stocks will crash – quickly enough.
Viral communications seems to some to be a bit of a newfangled, half-baked idea, of interest only to teenagers, tech nerds and obnoxious green-screen comedians.
But the science of crowd psychology is hardly a new idea at all. In fact, it’s quite old and well documented.
In his 1844 treatise, The Ego and Its Own, the anarchic philosopher Johann Kaspar Schmidt (AKA Max Stirner) wrote of individuals dominated by illusory concepts, fixed ideas and spooks.
Memes first show up around 1904 in biologist Richard Semon’s “Die Mnemischen Empfindungen in ihren Beziehungen zu den Originalempfindungen” (“Memory-feelings in relation to original feelings”) as “mnemes”. John Laurent writes on Maurice Maeterlinck’s use of the term mneme in his 1926 essay, “The Life of the White Ant.”
Luigi Luca Cavalli-Sforza and Marcus W. Feldman formulated quantitative models of cultural transmission and selection back in 1973. And the word meme shows up in its current form in Richard Dawkins’ 1976 book, The Selfish Gene.
Heck, I’m not even the first guy to think this stuff has strong business implications and applications. Just last week, I was browsing through an article out of the Harvard Business Review on Ernest Dichter’s work back in the sixties on crowd motivation.
Dichter is the supposedly “evil genius” who brought Freudian psychology to Madison Avenue on a silver platter. He is credited with inventing focus groups and such. He coined “put a tiger in your tank” for Esso. And when he determined young girls wanted something sexy in the dollhouse he created Barbie for Mattel.
Dichter determined there are four things that motivate a body to tell other folks about something. He was thinking about brands, but the ideas are really the viral spread of ideas – that is to say, memes.
Here are his four rules:
“The first (about 33% of the cases) is because of product-involvement. The experience is so novel and pleasurable that it must be shared.”
“The second (about 24%) is self-involvement. Sharing knowledge or opinions is a way to gain attention, show connoisseurship, feel like a pioneer, have inside information, seek confirmation of a person’s own judgment, or assert superiority.”
“The third (around 20%) is other-involvement. The speaker wants to reach out and help to express neighborliness, caring, and friendship.”
“The fourth (around 20%) is message-involvement. The message is so humorous or informative that it deserves sharing.”
I’d like to think I write to you each week because of Reasons #3 and #4, but my wife says it’s more likely #2.
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Putting Theory to Work
Now let’s put our viral skills to a practical use: determining when the markets will tip over into their next deep slump.
We already know many of the memes in play such as “Recession,” “Unemployment” and “Inflation,” and the upcoming end of the Fed’s free money program – AKA “QE2”. In fact, we can quantify the exact effect QE2 had on Blue Chip stocks.
This exercise offers us a pretty clear view of what has been going on over the past year or so, and what is likely to happen over the next year.
The Next Crash
To the right is a chart (click to enlarge) of the S&P 100 (OEX), marked off in monthly candlesticks. On it, I’ve noted the parameters of the overarching bear trend that has subtly governed investor behavior for the past decade. I’ve also marked in the Stacked Sell Signals of 2000 and 2008 that warned of the dramatic cyclic downturns to come.
Please note we are approaching the exact same technical and economic threshold that presaged both previous crashes. So the question at hand is not “will there be another downturn,” but rather “when and how deep?”
As I mentioned a moment ago, I have also laid in the Fed’s two free money “QE” programs. As you can see, these efforts are pretty much the only thing that kept the markets from collapsing early in the cycle.
But now they are part of the warp and woof of our little tapestry, and as such, are creating mini-cycles of their own.
The Worst Choice
Washington is now faced with a horrid choice: it can cease and desist printing and borrowing. Without this prop, the markets will, of course, collapse. But there is a chance that this breakdown will be limited in scope.
Or they can (and to be frank, most likely will) cave in to political pressure and commence QE3. This will buy one more upside leg, but will also cause the eventual crash to double in scope.
The best hope I can offer you is that I can find a way to monetize these moves via call and put options, regardless of which dark path Washington walks down. However, you will need to be able to buy the calls and puts I recommend.
So I strongly recommend you check out this free special report on how to score winning option contracts. Why are we giving away valuable info like this? Again, I’d like to think that it’s Dichter’s third rule.
But to be frank, we do have a second motive: We are financial newsletter writers. As such, we desperately need folks like you to stay profitable in both up and down cycles. So it is in all our interests that you acquire these critical tools.
Good luck and good hunting,
Editor, Wealth Daily