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Stocks , Investing

How "Irrationality" Rules the Stock Market Crowd

by Bob Stokes
Updated: January 14, 2019

A market commentator is comparing the stock market's behavior since the start of 2018 to that of someone in middle or high school (CNBC, Jan. 8):

The markets are behaving like an irrational teenager

Just like many teenagers, the markets have been moody and impulsive and has made split-second decisions based on emotions.

The opinion of market "irrationality" is clearly being offered with the past year's sell-off and jump in volatility in mind.

But, what about in 2017, when the stock market exhibited extraordinarily low volatility and just kept climbing? Or, for that matter, any other time when stocks were trending higher?

During those times, was the market then behaving "rationally?"

In order to address these questions, let me borrow a passage from the July 2015 Elliott Wave Theorist, which discussed Bejing's then warning against "irrational selling" of stocks:

Notice that it's almost always "irrational selling." It's almost never "irrational buying," "irrational inflating," "irrational lending, "irrational propping up of banks" or "irrational bailouts."

Of course, this same psychology applies to any nation.

In truth, the stock market is always non-rational -- and especially so near major bottoms, when almost everyone panics, or near major tops, when investors are happy to borrow money for a chance at profits.

This chart and commentary from the December 2017 Elliott Wave Financial Forecast is instructive:


On November 24, Rydex investors notched another new multi-year extreme, this time with the added risk of leverage. The total assets in bull funds in the Rydex Total Leverage Bull/Bear Ratio hit 14.4 times that of the total assets in bear funds.

Just two months later, investors were jarred by the start of a swift downturn, with the stock market surrendering around 10% of its value in late January and early February.

But, how does one explain investor "irrationality"?

In a nutshell, Robert Prechter's 2017 book, The Socionomic Theory of Finance, provides the answer:

In the financial marketplace, speculators are ignorant of others' future actions, producing uncertainty, so they herd.  

Put another way, investors tend to follow the crowd at all times, which is anything but rational.

As you probably know, the crowd is always wrong at major stock market turns.

The Elliott wave method reflects what really moves the market -- crowd behavior.

Now is the time to learn what our analysts anticipate next for the stock market.

Are You Prepared for "Wave 3"?

You see, in bull or bear markets, third waves are … well, let's quote from the Wall Street classic book, Elliott Wave Principle:

Third waves are wonders to behold. They are strong and broad. … Third waves usually generate the greatest volume and price movement.

So, in a bull market, investors like you don't want to miss the most powerful part of the rally. In a bear market, investors want to be properly positioned for the strongest part of the decline.

The Elliott wave model is now offering an important clue as to what's next for stock prices.  

Look below to learn how to tap into our analysts' insights without any obligation for 30 days …

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