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How to Withstand the Siren Song of a Market Rally

by Editorial Staff
Updated: April 15, 2020

Dramatic rallies go hand-in-hand with dramatic bear markets. The psychology behind bear market rallies is powerful and tempting, seducing investors to fall feverishly back in love with the market at just the wrong time. How can you withstand this temptation? The first step is to be aware of it -- and its results. Consider this description of a major bear market's beginnings from the April issue of The Socionomist:

In the early stages of the falling transition, optimism will persist. While a general climate of social anxiety creeps in, the overriding attitude will be that any hardships encountered will be temporary inconveniences and that society will get "back to normal" soon. Each rebound in the stock market will be met with declarations that the bottom is in, that the worst is over and that happy times are here again to stay. It wouldn't be surprising to see the death of the bear market declared prematurely on numerous occasions and for politicians and monetary authorities to take credit for getting stocks and the economy back on track.

Falling prey to this psychology will be tempting. It's much more pleasant to think that good times are around the corner than it is to recognize that the odds point in the other direction. Furthermore, believing in the return of the large-degree positive mood trend will feel right. Rallies in bear markets can be vigorous, and the herding impulse is a master at fooling society at critical junctures time and again. After the initial leg down of the 1929 crash, stocks rallied strongly into 1930. No doubt many embraced the idea that the age of prosperity was on the cusp of returning when in fact it was the last chance to make a safe exit before the worst of the devastation -- in the stock market, the economy, politics and social life -- began. As a cautionary tale, consider that even as late as March 1931, the New York Times ran a headline declaring, "PROSPERITY'S RETURN; SIGNS OF IT APPARENT." Instead, the Great Depression was about to accelerate further.

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It's not easy to guard your mind from the rally's siren song; yet, the step afterward is the most crucial -- and the most difficult. You have to act. Elliott Wave International's market forecasting services can help you prepare for changes in the market. To prepare for changes in your business, career, community and broader society, the Socionomics Premier Membership can help. Lean more in the page below.

Almost no one is ready for the ‘new normal’ in social life.

The world is changing fast. Entire countries are on lockdown. Interstate highways with little or no traffic. Empty stadiums, concert halls, bars and restaurants. Elections postponed. The Olympics postponed. Is this a temporary speedbump on the way to ever-greater prosperity, or are we seeing the beginning of a "new normal"? Get the answers you need and discover how to steel yourself for coming changes in the April 2020 issue of  The Socionomist, the flagship publication of the Socionomics Premier Membership.

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At the Socionomics Institute, we look at how the whole society is feeling today – so you can anticipate how society will behave tomorrow. Using various indicators, we track social mood in real time across the globe. You’ll see how changes in social mood shift everything from the songs people want to hear to the leaders they elect; from people’s desire for peace to their hunger for scandals.

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The Wave Principle of Human Social Behavior (1999) – Learn how history unfolds in form-driven fractal waves. Value: $39.

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A Look at the Perilous Psychology of Financial Bubbles

Investors justify financial bubbles all the way to the top. This perilous psychology led to massive losses after the market peaks of 2000 and 2007. Now, in 2020, the same warning is showing up in the financial news.

Off with His Head: Kingdoms Fall When Social Mood Shifts to Negative

Big negative social mood trends drive big market declines. These trends ALSO drive social conflict, even revolution. So in periods of big bear market declines, we see that monarchs also fall. Watch for yourself just how true this is.

2020: "May You Live in Interesting Times"

Lots has been said about how unprecedented 2020 has been. From the financial markets' perspective, the fast bear market in February-March -- followed by a fast recovery -- certainly fit the bill. Watch our Financial Forecast co-editor touch on a few more points.