Professor Elam

Friday April 14, 2017

Socionomic theory holds that mood is endogenously regulated, it is internally generated. It is not the result of external forces creating the mood, rather the other way round.

On occasion an event occurs subsequent to mood change which energizes the mood just beneath the surface. Consider this passge from a WSJ article on the UAL

passenger fiasco this past Sunday.

CHICAGO—An attorney for the passenger dragged off a United Airlines flight this week said his client was preparing to sue and that his treatment by United reflected the plight of many airline customers across the U.S.

“For a long time, airlines—United, in particular—have bullied us,” said attorney Thomas Demetrio, who is representing the passenger, David Dao, a 69-year-old physician. “You don’t treat the people who help make you the corporate entity you are like Dr. Dao was treated.”

Mr. Demetrio told reporters at a news conference here that Mr. Dao had suffered a concussion, broken nose and two lost teeth, and would require reconstructive surgery. Mr. Dao was discharged late Wednesday from a Chicago hospital, he said.

 

The key here is the second sentence. Notice that the attorney states, for a long time the airlines have bullied us. The attorney has put his finger on a long simmering negative mood towards airlines. And no wonder. Thanks to the shoe bomber waits in terminals to board planes are longer than ever. Passengers are crammed into as many seats as the airline can put on the plane.  Over booking is common. Cancelled flights leading to the ever present videos of passengers stranded in snow covered air terminals on holidays spring to mind.

And so UAL has probably wakened a 'sleeping giant' of negative social mood towards the entire airline industry.

This incident for the airlines may turn out to be the equivalent of the Tunisian vendor who set himself on fire a few years back.  And then all of North Africa was on fire as decades of simmering unrest roared to the surface.

Nassim Taleeb has written about random occurrences, fooled by randomness as he puts it. He labels such unexpected events as Black Swans.

Let me suggest that a Black Swan event is simply the occurrence of an event which triggers an unconscious mood to suddenly, apparently surface. It appears that the news or Swan has affected the mood. But in fact it is probably the other way around. The event triggers an already present mood which then explodes as herding among individuals takes place.

The Dow Transportation average usually gives an early warning signal on overall market turns. Consider the chart below.

The 13 day exponential moving average has dropped under the longer 34 day in early March. Now the average is dropping much faster pulling the 13 day lower.

 Russell 2000

The small cap Russell 2000 has done the very same thing in the very same time frame.

I suspect the Trump Bump rally has ended. Indeed it may be that the entire rally from March 2009 has ended.

Russell 2000 Monthly

This monthly chart displays a clear five wave pattern.