These last few weeks have been quite interesting and have brought out some intriguing comments from the investor and analyst community alike. Yet the underlying theme, as seen by this market observer, is that investors and analysts truly believe that they are being objective, when, in fact, they are simply being driven by their base biological drives without even realizing it, notes Avi Gilburt, founder of ElliottWaveTrader.
Allow me to begin to explain what I mean by citing a study you have likely seen noted from me before. In a paper entitled “Large Financial Crashes,” published in 1997 in Physica A., a publication of the European Physical Society, the authors, within their conclusions, present a nice summation for the overall herding phenomena within financial markets:
“Stock markets are fascinating structures with analogies to what is arguably the most complex dynamical system found in natural sciences, i.e., the human mind. Instead of the usual interpretation of the Efficient Market Hypothesis in which traders extract and incorporate consciously (by their action) all information contained in market prices, we propose that the market as a whole can exhibit an ‘emergent’ behavior not shared by any of its constituents.
“In other words, we have in mind the process of the emergence of intelligent behavior at a macroscopic scale that individuals at the microscopic scales have no idea of. This process has been discussed in biology for instance in the animal populations such as ant colonies or in connection with the emergence of consciousness.”
(Editor’s Note: Avi Gilburt is speaking at the 2025 MoneyShow Masters Symposium Miami, which runs May 15-17. Click HERE to register)
Effectively, this supports my premise that most investors and analysts believe they are viewing markets objectively. Yet, in reality, they are simply following the herd and coming up with reasons for doing so after the fact.
I saw an interesting article this past week entitled: “The S&P 500 is inflated by 25% because investors won’t focus on the fundamentals.” Let’s try to understand what this author was saying. The author is clearly under the impression that fundamentals are not driving this market. Therefore, something else is driving this market, and it is likely emotion, which causes investors to supposedly ignore fundamentals.
But the author is erroneously working under the assumption that fundamentals are what are supposed to drive the market. What the author fails to understand is that emotion is driving the market all the time, and not just when he perceives the market is not following fundamentals.
When the fundamentals align with the market, it is just coincidental. And, if you look at every major top and bottom in the market, you will not see any fundamentals supporting the move to those extremes, as they are always emotionally driven.
So, in the end, we must be honest with ourselves and recognize that it is really our emotion that makes subconscious decisions about the market, especially at the major turning points. Therefore, most will usually follow the herd and be uber-bullish at highs and uber-bearish at lows.
