I have long been fascinated by the phenomenon of herding.  Many animal species do it seemingly automatically.  For deer, a close knit group offers some kind of defence against predators who prefer to pick off stragglers rather than to attack the group.  That seems logical.

But in humans where life and death issues are not present, why do we herd in groups? I first noted extreme herding when the Beatles crashed onto the scene in the 1960s.  Watching the hordes of screeching-like-banshees sub-teen girls at Heathrow as the Fab Four disembarked was truly a sight to behold as a young lad who was immune to such behaviour.  It was dubbed Beatlemania – and a fitting sobriquet to this extreme form of a harmless mania.

Of course, this was not the first time young females had herded maniacally in such an extreme fashion around a popular icon.  It happened to the silent film star Valentino in the 1920s and then to the  young Frank Sinatra in the 1930s/1940s with the Bobbysoxers.

So why is one icon singled out among the multitude of similar performers to be the focus of the mania?  Is it engineered by the money men or is it a natural occurrence – or both? My son recently introduced me to a terrific documentary on one such very talented singer/songwriter in the 1970s.  While other similar artists such as Bob Dylan and Joan Baez were achieving massive success, this guy went nowhere (except bizarrely in South Africa!).

It is Searching for the Sugarman and is a classic tale of someone having huge talent that failed to attract a following while others with perhaps lesser talents made it big.

Talent alone is not the key, obviously.  So what attracts people around one focus as bees to honey?

Of course, pop music extracts the most intense emotional responses among young females, but it is the stock market that does the very same thing among both men and women. Trading/investing is a highly emotional experience and displays a similar level of herding and manias at various times – and this is one of them!

Would any rational investor pay the current P/E valuation of 380 for Tesla shares today?  

It is a fact that most people are attracted to crowds.  A motorway accident always slows traffic down in both directions in the ‘rubberneck’ phenomenon. And today we have online forums where some one can post a bullish article about share A and that can be taken up by a growing band and then the movement feeds on itself.

Of course, not every bullish post grows in influence.  So whey do some grow and others do not?  It is the same selective process as in pop music. 

The whole idea of popularity seems to be an unconscious drive to gather around that artist or share just as does iron filings to a magnet.  But these manias have a life cycle of their own.  Beatlemania only lasted a few years and then the fan base moved to the more mature phases.Their music was no longer novel and when the girls’ mothers became fans, the mania died.

And the share manias we have seen over the years similarly have a life cycle.  The Dotcom mania in the 1990s died a nasty death in the 2000s.  And of course, the historic Tulipomania in the 1637 was a short-lived affair when ‘investors’ regained their senses.

One of the most fascinating aspects of the current pandemic is the almost universal compliance with the twists and turns of all the latest government lockdown rules and guidelines here in the UK (less so in other countries).  It seems the whole country is herding!

But it follows the UK national character where following the rules is an inborn national instinct.  Pioneers we are not (we went through that phase in the Industrial Revolution over 200 years ago).

I have a theory that because the UK is a very crowded island, conformity is highly prized since upstarts might upset the apple cart and change people’s lives – and that is to be avoided at all costs.  Communism tried it in the 1930s but got nowhere.  On the other hand Russia, being a far less crowded land, was fertile ground.  As is China.

So we can surely rely on history to anticipate the death of the current tech mania? But with the post-2009 bull market long in the tooth, has such an inflection point arrived?

I have been extensively been covering the FAANG Gang and Tesla for COTW this month.  I did not choose this month randomly.  All year, I had been watching fascinated by the exponential rallies in many issues.  But early this month, I sensed the end of the road was nigh.

In my last blog of 11 July (I skipped last week) I made a case that Tesla shares were very likely reaching its zenith.  The short interest had collapsed as many high-profile hedge fund shorts threw in the towel and the teenage Robinhooders has discovered trading Tesla call options was loads of fun – just like one of their computer games in fact.

As I write, the shares are trading at $1420 against the $1720 ATH made last Wednesday – a drop of 17% in four days – and of course, the call options bought recently have zero value.  Oops!  I guess those ‘unlucky’ teenagers will have to slink back to Mom and Dad who will have have to cut off their allowance.  Some Christmas ahead! 

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And here is Apple

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Another major trendline broken.  And here is Alphabet (Google)

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This week, it hit the major 6.5 year trendline in wave 5 of 5 – the top.

All three display major bear signals.  In the case of Tesla, Apple and Alphabet, they are leaders in their field.  They have been considered untouchable.  The herd believe they will always be so as there is no obvious challenger to any of them.

But as I wrote recently the exact same was said for Radio Corporation of America (RCA) in the late 1920s.  Then, it was the supreme leader in the new radio and the even newer TV revolution.  According to the herd, it was destined for great things.  But a funny thing happened on the way to share price nirvana – the Wall Street Crash intervened.  RCA shares plummeted even though it remained the radio and TV leader for years afterwards and was highly profitable.

The only change was the re-rating by the market of the shares from a high P/E to a low one.

So on the RCA upswing, it was the bulls who herded and many became maniacally positive so long as prices continued rising.  Success breeds success! But when the trend changed, the bulls were no loger so positive and were forced out of the market.  Then, the bears took over until they too became a herd who were relentlessly pessimistic all the way down to the lows.  And that was the greatest time to invest!

The bulls learned a lesson the hard way – there is often a great difference between the performance of the share and that of the company.

 

Sentiment is hugely positive

I quote sentiment frequently in my analysis.  But sentiment is not like a physical property such as temperature where we have thermometers that can register temperature as accurately as you wish.  Not so with sentiment. An extreme in sentiment reflects a high degree of herding – and the potential for disappointment! There, we must infer the state of herding from indirect readings of such data as Put/Call ratios, sign-ups to trading platforms that cater to the most inexperienced ‘investors’, and my perennial favourite, the momentum divergences on the charts.

Here is a recent chart of the S&P Put/Call ratio.  Note that at the March lows when pandemic fear and gloom was across the land, the ratio stood at around 1. Considering that stock market bias is always to be bullish, this is a remarkably high reading.

chart courtesy www.elliottwave.com

But as the market improved, more call buyers entered (the Buy-the-Dip effect) and the ratio surged to the recent 20-year record of 0.44.  In other words, there is now well over 2 calls bought for every put – a sentiment extreme

That is a staggering turn-around.  Note also the improvement off the March lows appears a a five wave pattern – a terminal pattern.  Of course, these readings can get even more extreme before they terminate.  But this is one  more clue that the relief rallies are in their very late stages.

Again, I have a picture that paints a few thousand words.

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I have accurately followed most of the twists and turns of many markets this year.  I have just started VIP Traders Club members on a bear campaign in the stock indexes which I expect to run for weeks/months.  The profit potential is massive.

If you wish to join us, take a two week Free Trial to my VIP TRADERS CLUB where we trade stock indexes, currencies, gold and much more.  Or take a generous three week Free Trial to my PRO SHARES service where we trade individual UK and US shares .

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Launch of my Tramline Fund 1

I have been mightily pleased (or should that be frightened?) that over 60 investors have joined me in this new venture. We started trading on Tuesday where we got off to a flying start.  I am trading only the stock indexes, T-Bonds and currencies in this fund, but may consider adding another fund that trades commodities such as Coffee and Cocoa, as well as Crude Oil – if there is enough interest.

 

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