8/4/2010 - The Failure of Socionomics

The Failure of Socionomics
By James Kostohryz Aug 04, 2010 9:15 am


http://www.minyanville.com/businessmarkets/articles/socionomics-elliot-wave-principle-stock-markets/8/4/2010/id/29457?page=full

http://www.minyanville.com/businessmarkets/articles/socionomics-bear-market-indicators-bull-market/8/4/2010/id/29465?page=full

Socionomics starts from an intriguing premise. It states that social mood isn't the product of social phenomena; social phenomena are the product of social mood. Furthermore, the hypothesis states that fluctuations in social mood exhibit repetitive patterns that follow the Elliot Wave Principle, and are therefore predictable. 

One implication of the socionomics hypothesis is that if one can correctly predict the tendency and tenor of social moods then one can predict the tendency and tenor of the stock markets and other areas of human endeavor such as fashion, music, politics, international relations, etc. 

Socionomics has gained popularity for several reasons. First, the hypothesis is intriguing to many if for no other reason than the fact that it runs counter to conventional understandings and intuitions about the way the world works. Second, from an emotional point of view, the socionomics hypothesis, like other historicist ideas, satisfies a basic human longing to be able to find order and/or meaning in life events that often seem random or meaningless.

Over the years, I have been personally intrigued by the socionomics hypothesis; so much so that I have read a considerable amount of socionomics literature. I have also worked alongside highly skilled practitioners of this theory (particularly the Elliot Wave component) as applied to finance.

Nevertheless, in time, I've concluded that socionomics fails rather dramatically as a system of social analysis and prediction, and even more emphatically as a system of stock market analysis and prediction. 

To understand why, I think it will be useful to analyze the article, Coming Soon: Bear Market TV, written by Robert Jay of Elliot Wave International. This article, although it focuses on the specific issue of popular television programming, is quite representative of the socionomics literature as a whole in its approach to sociological and stock market analysis. With all due respect, I would humbly submit that the article highlights some of the most important weaknesses in the socionomics paradigm.

Socionomics as a Means of Social Analysis

In the socionomics literature the notion of scientific empirical analysis of social phenomena isn't embraced; it's usually dismissed if and when the subject is broached at all. The alternative approach generally employed by the socionomics literature is the selective application of anecdote. This approach is well represented in Jay's article.

In this article, the author names a few TV programs and an isolated historical incident that presumably support his interpretation of the relationship between social mood cycles and stock market cycles. However, there's absolutely no attempt to empirically validate the author’s contentions through a more thorough statistical study of tendencies in television programming. In fact, not only are the social moods expressed through TV programs not specified or quantified in any way, the dates of the stock market and TV phenomena cited aren't even clearly cited. Admittedly, an empirical study of social mood as reflected in television programming and stock market performance would be a difficult undertaking. But it's also clear that cherry-picking a few anecdotes and dates cannot pass as good social analysis.Let’s see how this sort of analysis fails in this particular case: 

The author claims that darkening social mood and the associated secular bear market, which presumably started in 1966-67, was signaled by an incident on the Smothers Brothers Comedy Hour in which the rock band The Who set off some explosives. Yet we must ask: Did the various antics on The Lawrence Welk Show, which was running at the same time, also signal the bear market? Or how about the social mood reflected in Gomer Pyle USMC? How about The Beverly Hillbillies? Or could the social mood reflected in Bewitched have signaled the bear market? All of these lighthearted and wholesome shows -- far more representative of TV trends during the era, by the way -- were running during the same dates as the incident described.

Later in the article, the author claims that the 1973-74 bear market was somehow foreshadowed, or reflected by, or simply coincided with, “darker” programming such as All in the Family. However, we must once again ask: Was the bear market social mood that was presumably prevalent at this time (according to socionomics) also foreshadowed by iconic contemporary programs such as The Brady Bunch, The Partridge Family, and Happy Daysthat ran during the same time period? Those shows were about as positive Pollyanna as one could get!

Now let’s fast-forward and examine the author’s claim that, “the bull market of the 1980s and '90s included a return to popular family-oriented shows, like The Cosby Show and Full House.” In isolation, that anecdotal statement might sound intriguing. However, did drug-filled crime shows like the early eighties hit Miami Vice, also signal the bull market?” How about The A-Team as bull market indicator? Finally, to name one last set of examples, the mega popularity of Dallas and Dynasty and the dysfunctional families that they featured hardly seem to be consistent with the author’s association of sunny family programming and the bull markets of the '80s and '90s.

The author highlights the TV show Friends as reflecting the social mood of the '90s bull market. But isn’t this just cherry-picking? Why didn't the author mention the socially dysfunctional and depressing families and individuals in TV shows such as Roseanne, Beavis and Butthead, Melrose Place, and The Simpsons? Is foul-mouthed South Park a bull market phenomenon? Or how about the social decadence decried in Murphy Brown by the Vice President Dan Quayle? Or why was the permissiveness of Will and Grace not mentioned as a sign of cultural decay?

The author discusses bear market symptoms such as, “Moral ambiguity, decadence, expanded sexual boundaries, addiction, drug dealing, violence, vigilante murders, and the dysfunctional-yet-surviving family.” Yet why didn't he mention the hit series from the roaring bull market '90s called NYPD Blue which seemed to package and showcase all of these various ills in one convenient weekly dosage?

In my view, it's pretty clear that the selective anecdotal approach employed by socionomics fails as social analysis.Socionomics as a Tool of Financial Analysis 

Unfortunately, socionomics fails even more miserably as it relates to financial analysis. One of the biggest problems that I see in socionomics is that its promoters aren't at all clear about whether social and cultural trends lead the stock market or whether the stock market leads social and cultural trends. Socionomics clearly claims that social mood leads markets. However, the promoters of socionomics aren't at all clear about how they identify or measure social mood. Furthermore, the socionomics literature isn't at all clear about how different expressions of social mood manifest themselves chronologically, and it offers no practical means for detecting trends in the evolution of these trends.

Let us take the example of the cultural trends reflected in popular TV shows. The socionomics literature isn't clear at all on the issue of whether cultural trends as reflected in social phenomena such as television shows are predictive of stock market trends, or whether stock market trends are predictive of the cultural trends reflected in social phenomena such as television shows. This sets up a "heads I win, tails you lose" phenomenon for the proponents of socionomics. For example: If a particular television show exhibits a “bearish” trend before a bear market manifests, then the socionomics expert will claim that the cultural trend evidenced in the television show was “predictive.” On the other hand, if the “bearish” cultural trend appears after the onset of a bear market, the socionomics expert will claim that social mood reflected in the stock market “predicted” the TV content. The ambiguity and ambivalence surrounding these issues coarses through the Jay's article.

To see how, let us start with The Who incident cited by the author. (Hardly an important cultural event in my humble opinion.) As it turns out, September of 1967 happens to fall right smack dab in the middle of a major multi-year bull market. Therefore, from the timing of this incident, it's absolutely impossible to tell whether it's a lagging indicator of the 1966 bear market, a coincident indicator of the October 1966 to December 1968 bull market, or whether it was a hyper-mega leading indicator of the 1970 bear market, or perhaps even the 1973-1974 bear market.

Let’s take some of the author’s other examples. The article mentions All In the Family as a signal or reflection of the bear market of 1973-1974. Well, it was a pretty lousy signal. The show aired in January of 1971, right in the midst of a massive multi-year rally and during the heyday of the “Nifty-Fifty.” Interestingly, the Archie Bunker franchise ended in 1983, a few years after the largest secular bull market in history had gotten underway. I see no signal there. In fact, there's no relationship to markets at all. This particular TV show cannot be seen either as a leading indicator, a coincident indicator or even a trailing indicator.The author also mentionsThe Cosby Show. Sure, one could tendentiously argue that it “signaled” or “reflected” the bull market of the 1980s. But that's far from clear. The show actually first aired in late 1984, several years after the '80s bull market got started. Similarly, shouldn’t the demise of the The Cosby Show, a bull market icon according to the author, have signaled the onset of a bear market? Well, as it turns out, the show went off the air in 1992, right before a massive multi-year rally. 

Finally, the beginning and end of the show Full House, also mentioned by the article, which ran from 1987 to 1995, has no apparent connection to any stock market movement whatsoever -- up, down, or sideways.

Conclusion

Socionomics starts from a fascinating premise: Trends in social mood determine and precede movements in the stock market. As such, the proponents of socionomics claim that one can predict stock market movements by carefully observing trends and tendencies in the popular culture. And/or perhaps vice-versa.

There's just one problem: There's absolutely no proof of this. To the contrary, the constant use of selective anecdote by the proponents of socionomics is one of the strongest indicators of the weakness of this hypothesis.

In fact, most available evidence points to the contrary thesis. Social mood actually tends to get darker after a bear market has been underway, not before. Likewise, social mood actually seems to get brighter after a bull market has been underway, not before. 

Social mood was at its darkest point in modern American history in the late '70s and early '80s. It wasn’t until the economy started growing after 1983 and the stock market boomed that social mood turned around and Americans started feeling good about themselves again.

Let us fast-forward to the period before the dot-com bust. If you had invested based on any measurable gauge of social mood, there's little doubt that you would have bought stocks at the top of the bull market in late 1999 and early 2000. If you invested in stocks based on the social mood in the aftermath of 9/11 you would have sold stocks, right before one of the most powerful rallies in modern history. Finally, social mood, by virtually any objective measure, was flying high right before the onset of the housing and financial crises in the 2007-2008 period. A person that had bought stocks based on such a reading of social mood would have been crushed by the most dramatic bear market since the Great Crash of 1929. In all of these cases, the turn in social mood did not precede but followed a turn in the stock market, the economy or in broader social events (such as wars).

In sum, social mood seems to be a lagging, not a leading indicator of social phenomena and of financial markets phenomena in particular.


In part one of this article on the failure of socionomics, I analyzed some shortcomings of the theory as reflected in the article, Coming Soon: Bear Market TV by Robert Jay. However, I don't want readers to think that I've “cherry picked” this particular article to make a point.

I encourage readers sympathetic to the socionomics hypothesis to take a look at the very well produced video History's Hidden Engine. This is Elliot Wave International’s top promotional video. Among other things, this video goes over a series of cultural events and attempts to relate them to bull and bear markets.

I encourage readers to meticulously look up the dates for fashion, musical, cinematographic, and other events cited in the documentary and then carefully plot them on a stock chart. What they will find is two things:

First, the anecdotes selected are highly arbitrary: Why pick the cited song, movie, or fashion trend rather than another?

Second, when you plot these events carefully on the graphs, they just don’t add up. Given the timing of these events and their relation to the stock graphs, you can’t tell whether said events are leading, coincident, or lagging indicators of the stock market.

It seems strange, but it's nonetheless true, that having the propensity to cherry-pick events to fit their theory, proponents of socionomics cannot even seem to get their dates straight. This is just as true in the Jay's article as it is in the documentary film, History's Hidden Engine.

I'll let readers do most of the research. But here are a few highlights of the shoddy research and analysis featured in this film:

Women's Hemlines
The film parrots the popular legend about hemlines being predictive of stock prices. However, the only evidence for the so-called “hemline indicator” is selective anecdote. No reliable data set have been offered by proponents, and certainly not any socionomics researchers, that would allow analysts to replicate and verify this hypothesis.

Several analysts that have examined the matter have frowned on the theory. For example, fashion historians have shown that hemlines started to come down in 1927, right in the middle of the bull market, and more than two years before the 1929 crash. Want some more simple contrary examples? Miniskirts don’t get much shorter than the ones that Marcia Brady was wearing in 1973 and 1974, but that hardly heralded a bull market at that time.

How about more recent times? Super short miniskirts and stiletto heals were the hot trend according to market analyst Prieur du Plessis in June of 2008. Did that signal a bull market? Again, miniskirts where the hot item in spring collections for 2008 according to Catherine Valenti of ABC News, yet few would claim that these were go-go times in the economy or stock market.As far as I'm aware, the only formal study of the relationship of hemlines to the economy or financial markets that's made a serious attempt to go beyond the anecdotal was presented in an econometric paper by Marjolein van Baardwijk and Philip Has Franses of the Econometric Institute of the Erasmus School of Economics in the Netherlands. Their study is based on verifiable data sets with measurable criteria which they compiled. Their conclusive finding was that hemlines were neither leading nor coincident indicators of economic growth.

The aforementioned researchers did find a relatively weak correlation to economic growth when a  3- to 4-year lag was applied. In other words, at best, hemlines might be a badly lagging indicator of economic growth. Or it's possible that the rate of economic activity might be a long leading indicator of hemlines. Still, the long lag detected may make even this positive correlation spurious.

In any event, it's clear, due to its null predictive value and the large lag found by the researchers, that the so-called “hemline indicator” is of absolutely no use for the purpose of financial analysis.

Movies

The film claims rather authoritatively and emphatically that horror films are only produced and become popular during bear markets. This claim is embarrassingly false.

In association with the '80s bull market we could talk about horror movie classics such as The Shining, An American Werewolf in London, The Evil Dead franchise and The Hitcher. And who could forget such classic horror characters as Freddy Krueger in Nightmare on Elm Street or Chucky in Child’s Play? And the horror classic, Poltergeist (“They’re here”), was as scary a movie as has ever been produced.

No horror movies in the roaring bull market of the '90s? How about Scream, just for starters? We could go on to mention classics such as Candyman, The Blair Witch Project, Misery, andDead-Alive, (the latter considered by many to be the goriest movie of all time). And you could even throw in Silence of the Lambs, for good measure.

Socionomics scholars might know a great deal about many things. But they don’t seem to know much of anything about horror movies and/or their relation to social mood and stock markets.

Wars

The film claims that wars tend to occur toward the end of a multi-year decline in social mood. The Civil War and World War II are cited as examples of this principle. However, the film conspicuously omits mention of the Spanish-American War, World War I, and the Vietnam War, which were all immediately preceded by periods of national prosperity and optimism, if not outright triumphalism in the US.

And where was the multi-year decline in social mood leading up to the First Gulf War, the invasion of Afghanistan, the Iraq War, or the broader War on Terror? These military conflicts were all preceded by major multi-year bull markets and positive indicators of social mood generally.

Again, the socionomics hypothesis relating social mood to war simply doesn't hold up to scrutiny.Music

The film presents a selection of musical trends and songs, plots them on a rolling stock market graph, and claims there's a relationship. The problem is that the presentation is bogus. For example, based on lyrics and harmony one could argue one way or another whether the music of Elvis and later The Beatles should have been associated with bull markets or bear markets. Music and social critics have argued both sides of this issue, but the documentary doesn't address this point at all. How can a documentary that claims to analyze the relationship of music to social mood and the stock market fail to analyze the social moods expressed in the music of Elvis and The Beatles even though these were arguably the two most important musical phenomena of their respective eras?

Another omission in the film is in regards to disco music in the late '70s. Disco is clearly very positive and upbeat in terms of lyrics and harmony, and yet stocks at this time were in a deep bear market.

In another omission, the film completely fails to mention rap music during the '80s and '90s. This often-violent musical genre, subversive of musical and societal norms generally, has been at its peak during the bull markets of the past decades. This is a clear contradiction of the socionomics hypothesis.

Many other contradictions could be cited. For example, music of Alanis Morissette and her hit album, Jagged Little Pill (one of the best selling albums in history) were considered by social and musical commentators at the time to be profound expressions of deep social “angst” in the mid to late '90s. However these descriptions of the social mood expressed in Morissette’s music completely contradict the social confidence and optimism that were associated with the roaring dot-com stock market boom of this specific era.

Again, from decade to decade, socionomics fails to show any connection between musical trends and the stock market.

Conclusion

When one analyzes History's Hidden Engine, as well as the socionomics literature more generally, one can only conclude that socionomics fails by commission and omission, even on its own terms. In the absence of solid empirical evidence, promoters of the theory employ a highly selective use of anecdotes. Even more embarrassingly, many of the anecdotes employed by the promoters of socionomics either don’t support the theory or even refute it.

Having said that, nothing in this article is meant to suggest that social mood is unimportant to stock market investing. It's my belief that it's quite important. However, I think it's quite clear that there's no simple relationship between social mood, cultural trends, and the stock market, as socionomics implies.

It's my view that social mood is both a dependent variable (determined by social trends and the stock market) and an independent variable with a life partially of its own (with the capacity to influence social trends and the stock market). I believe that there's a relationship between social mood, the stock market, cultural trends, and social phenomena. It’s just that I've found that socionomics and the Elliot Wave contribute little or nothing to our understanding of these relationships.

There's absolutely no evidence that social mood and associated social phenomena follow the Elliot Wave Principle. And it's been shown quite definitively in every serious study I've seen, that there's no relationship between stock prices and Elliot Waves.

By simplifying these complex relationships and furthering a false historicist view, socionomics and the associated Elliot Wave Principle have, in my view, impoverished the state of our collective knowledge of how social mood, culture, and social phenomena -- including stock market trends -- arise, evolve, and interact.