How Do Bear-Market Moods Differ from Bull-Market Moods?

The Wall Street Journal's Life & Style pages reported this week that Ralph Lauren's new spring looks hark back to the Dust Bowl -- that's right, his runway models wore outfits that recalled Henry Fonda's tattered overalls and cap from the movie based on John Steinbeck's book, The Grapes of Wrath. The article's subhead said, "Why Old-Timey Fashions–Even Torn Overalls–Offer Reassurance in These Times." Here at Elliott Wave International, are we surprised that fashion reflects social mood? Not at all. Bob Prechter even takes it a step farther to explain how fashion and the financial markets are tied together -- and how bear-market moods differ from bull-market moods.

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Excerpted from Prechter's Perspective, published 2004

A reader once sent a letter to Barron's with a hearty "phooey" to your article about popular culture. He accused you of implying that investors should have been reading Women's Wear Daily instead of The Wall Street Journal.

Bob Prechter: That's exactly what I was saying.

What's the difference?

Bob Prechter: There is little difference in what they reveal about the current mood. When Women's Wear Daily is showing frisky fashions, The Wall Street Journal is in a frisky mood, too. The problem is that the Journal also gives opinions on the markets and the economy, and people take them at face value rather than for what they are: an expression of the prevailing mood. … So you're much safer with Women's Wear Daily.

This alternating current of ebullience and conservatism goes back to the most basic Elliott wave idea: Bull markets give way to bear markets, and vice versa. What are the essential ways in which bear market moods differ from those of bull markets?

Bob Prechter: In bull markets, people focus on progress and production; in bear markets, they focus on limits and conservation.

O.K., I can see that. What else?

Bob Prechter: Bull markets result in increased harmony in every aspect of society, including the moral, religious, racial, national, regional, social, financial, political and otherwise. Bear markets bring polarization. With that realization, you can predict increasing cooperation in all those areas in bull markets, and increasing conflict in bear markets.

It's hard to imagine turning bearish when peace breaks out all over or turning bullish on society in the depths of scary times.

Bob Prechter: A scary world is perfect for stocks, and a perfect world is scary for stocks. When the world appears perfect, most investors have their money in the market, and there is little or no buying power left to fuel the uptrend and nowhere to go but down. When it appears scary, stocks are cheap and hold huge upside potential.

So people get it backwards.

Bob Prechter: Exactly, people consider these to be the events that shape their futures, but they only reflect the past trend of social mood.

What is it that people are unprepared for now?

Bob Prechter: The bear market will bring back nationalism, racial exclusion, and perhaps even religious conflict. Thinking technically about events, that is, observing what they reveal about social psychology, prepares you for those changes, whereas trying to predict the future from the events themselves leads you to the opposite, and wrong, conclusion. It cannot be stressed enough, because life-or-death decisions can depend upon your assessment. Notice what marks the major bear-market lows of just the last 200 years – the Revolutionary War, the Civil War and World War II. Those were buying opportunities.