You've seen it a hundred times.
A trader watches a stock move up after making a bottom. The stock zooms past one resistance level after another.
Onward and upward it soars.
Finally, the tepid trader can take it no longer. He simply must have that stock, so he enters his buy order.
Then, just as the order is made, the stock stops moving up. It stalls out. Then it goes sideways for a few days. Then it drops like a stone and continues falling through one price support after another.
Finally, our frazzled trader throws in the towel and sells out, just about the time the final low is being made.
Why does this ridiculous example of how not to trade in stocks keep repeating itself for so many today? After all, with all the books and trading software out there designed to help traders make the right moves you'd think it would be unheard by now.
Yet traders continue to make the same emotional mistakes they've made for the past hundred years. Why?
Some attribute the consistent failures of traders who buy at the top of moves and sell at the bottom to human nature. Maybe. But even lab rats will eventually stop making the same mistakes and work their way through a labyrinth after a few tries.
I don't believe "stupid human nature" can be used as an excuse for the consistent repetition of bad trading habits. There's more to it than that.
I say it can be explained by hypnosis. What else could explain traders who consistently repeat the same kindergarten errors time after time, sometimes for years on end?
Hypnosis is difficult to define in specific terms. There are myriad ways of inducing it and these can be accomplished in the waking state just as easily as in the trance state.
The financial markets are governed by hypnosis. This is one explanation for the phenomenon known as Jim Cramer. Cramer is one of the leading hypnotists for the perma-bulls. (CNBC is another medium for the induction of trance-like states for millions of traders and investors, but that's another subject entirely.)
Along these lines I recently had an intriguing phone conversation with a friend and fellow market technician. The conversation turned to stock market guru Jim Cramer of the hit CNBC show "Mad Money." Cramer is of course known for his wild-eyed, high-octane rants about anything and everything related to the stock market. He has a legion of loyal fans, many of whom hang on his every word and religiously follow his investment advice.
Aside from technical analysis, this friend shares with me another fascination: how mass psychology and hypnosis are used to manipulate crowd behavior. His formal training in this area, combined with his experience as a trader, provides him a unique perspective of how mass psychology principles are applied in the investment realm.
I was rather shocked when he suggested to me that Cramer was utilizing an arcane method of communication which has been known to induce hypnoidal or trance-like states in the subjects who are exposed to it.
"You can tell right away he's inducing hypnotic trance states in some of his viewers by the way he moves his eyes and by his elocution - his emphasis of certain words - and the way he raises and lowers his voice when delivering monologues," my friend observed.
I asked him if he felt this was conscious on Cramer's part. "Probably not," he responded. "He may not even realize himself he is doing it [inducing hypnosis in the viewers]. Some people are born with a gift of being able to entrance others, to initiate trance-like states by talking or in their use of hand gestures or facial movements. These are your natural born salesmen."
"Whether or not he's conscious of what he's doing, he's definitely using hypnosis on his viewing audience."
When you combine the distinct charismatic qualities of a media icon like Cramer with a mass medium such as television, which has been shown to induce hypnoidal states in the viewer, you have the ingredients for hypnotic suggestion. In a word, control.
This is not to suggest that Cramer is some sort of mind control freak. Rather, it's to sound a note of caution on what could be a dangerous path for Cramer's religious followers. Stock market history is rife with examples of what happens when too many investors follow the advice of an exalted guru, which is all too often delivered with primal emotion instead of sound reason. (Does the name Joe Granville ring a bell?)
Every bull market has its ringleader and this one is being led by Jim Cramer. This isn't intended as an attack on Cramer. To the contrary, my sole purpose is to warn investors from allowing themselves to get carried away by his hyper-emotionalism and excessive enthusiasm for various stocks, the longer-term merits of which might sometimes come into question.
The perma-bull gurus have their counterparts, however. Indeed, the perma-bears have their own hypnotists as well.
With the perma-bears the most commonly used form of hypnotic suggestion is old-fashioned repetition hypnosis. This consists simply of repeating the same message over and over. If a trader is exposed to the message long enough, he'll be tainted by it to some degree or other.
"Somehow the perma-bear outlook doesn't fit me, though I do find myself feeling so provoked by them, and often persuaded by them, -- especially when I witness rising street prices in my everyday life. Kind of fits a mental picture for me, but not my deep down soul nature."
That's how one stock trader expressed to me his allure to the perma-bear message in spite of his better judgment.
Anyone can become entranced by the perma-bears message of doom-and-gloom if exposed to it long enough. This is how hypnosis works for the ringleaders of the super bear sect.
One of the attributes of hypnosis is that the person who is a victim of it doesn't realize he's under posthypnotic suggestion at any time. In other words, he's completely oblivious to the fact he's under hypnotism's spell.
This explains why traders keep repeating those same bad habits of buying at tops and selling at bottoms, year after year. He's under the influence of media hypnosis.
Another example of how hypnosis works to the advantage of the smart money and against the public is during stock market corrections within long-pull bull markets. This year, for instance, investors have become increasingly skittish as the fear and dread of another financial panic takes firm hold on trader psychology.
For weeks investors have been reminded by the press of the infamous 1987 stock market crash, which resulted in untold losses for countless investors. The specter of a similar crash continues to haunt countless traders and investors as they head for the exits and run to the safety of cash in anticipation of the next market massacre.
You can see the effect that media hypnosis has had on the collective minds of traders throughout 2007 in the chart below. This chart depicts the number of times the stock market has completely sold out as defined by days when the upside/downside volume ratio on the NYSE is at least 13:1 or greater. This is known as a "Volume Climax Day" and it typically means the public has completely sold out of their long positions.
In most years you normally don't see more than one or two such volume climax days. And in some years (though admittedly rare) you don't see any. Yet in 2007 to date there have been 11 such days! Surely this must be some kind of record.
What does this growing tendency to panic and sell out by the public mean? Well for one it suggests the average trader has become increasingly short-term focused. It also shows that at the mere suggestion of financial trouble (as trumpeted in the news headlines), traders by the multitudes will unload stocks and head for the bomb shelters.
It wasn't too terribly long ago that the retail investor was instructed to hold through stock market corrections and even to "buy the dips." This was the hypnotic instruction given to traders and investors at the height of the late '90s bull market. That was at a time when stock valuations were completely off the charts as shown by the IBES Valuation Model (see chart below). Of course those instructions suited the insiders, enabling them to unload their positions ahead of the bear market that began in 2000.
Today we see a completely reversal of this situation. Instead of "buy and hold," traders/investors are instructed to "sell at the slightest hint of danger." The difference is that this time around, the insiders are using these mini-panics and corrections to load up on stocks as shown by insider buying data. The valuation picture is also far superior to the market of the late '90s. This means that the "smart money" that buys the pullbacks is getting value for their purchases.
To this day, 20 years after the event, the memory of October '87 is still burned into the collective psyche of the public and is reinforced hypnotically every year by a spate of bearish messages from the financial press.
To take another example, this year's October was even worse than most in terms of investor sentiment. A majority of respondents to a MarketWatch.com opinion poll admitted being afraid of an October crash. (This year of course marked the 20th anniversary of the infamous 1987 stock market crash. The mainstream media has made extra sure you remember that fact!)
A narrow majority of MarketWatch readers who responded to an online poll this week said they are either "very" worried or "somewhat" worried about a market crash in October.
Some 12,037 votes were cast in response to the question "How worried are you about a market crash this month?"
Readers were given four choices:
1. Very: My money's in the mattress.
2. Somewhat: I've adjusted my allocations.
3. Not very: I'm diversified and upbeat.
4. Buy! Buy! Buy!
Those saying they were either "somewhat" or "very" worried totaled 6,380, or 53% of all those responding.
Of those responding, 3,876, or 32.2% chose "not very," while 3,766, or 31.29%, chose "somewhat."
On the more extreme ends of the spectrum, 21.72% of the readers chose the response "Very: My money's in the mattress," while only 14.8% chose the response "Buy! Buy! Buy!" [Source: MarketWatch.com]
Now what can we learn from this investor sentiment survey? For one, there's a lot of fear and trepidation out there as we enter the final weeks of 2007. Investors have been hypnotized into believing that this is a bad time to be in the stock market. The same fear was evident in the waning weeks of the year 1987. Yet how did 1988 turn out? Better than most expected.
In his classic book "Hypnotism," G.H. Estabrooks defines hypnosis as an "emotional shock." He further elaborates, "Hypnotism is a particular form of direct or prestige suggestion, something to which we are all exposed every day of our lives." He drew particular attention to the mainstream media of his day. Has anything changed in our day?
If anything, media hypnosis is even more widely used today than ever before. And nowhere are the effects of hypnosis more evident than in the financial press, or more specifically, in the hyper-emotional reactions of retail investors to the negative suggestions made in the news headlines every day.
The key to success as a trader is to block out this media hypnosis and avoid the tendency that most traders have of being "emotionally shocked" (i.e. hypnotized) each and every day. The road to lasting success lies in going the opposite direction of the headlines, not in succumbing to their suggestions.
