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Heralding Change: August 2017

A stock market rally that won’t stop for anything has been the status quo since February 2016.  There have been geopolitical uncertainties, election surprises, and political confusion, but the market has barely given a shrug to any of it.  The month of August should at least give it pause, and may herald a change of trend that brings the market down… at least for a few months.  Looking within patterns of social mood and translating that into likely market behavior, one can see that August is heralding a message: Something new this way cometh.

Research spanning two decades has shown that what we collectively focus on, as seen in the top internet search trends will show up in market movement and news events soon afterwards.  Daily search trends are shown to be related to market movement three days later, whereas weekly trends are related to market ups and downs about three weeks later, and monthly search trends appear to show up as market movement and often in news events about three months later.

The source data for August’s projections comes from May 2017 top trends.  Imagine taking the mood that accompanies Mother’s Day, the Manchester terrorist attack at an Ariana Grande concert, Chris Cornell’s suicide, and the death of the American TV personality, Christopher Boykin and somehow adding them together.   Other than Mother’s Day, they don’t sound like they would make a pleasant cocktail.  However, it’s not always that straightforward.

In order to combine these, they are first broken down into themes.  Mother’s Day becomes woman, family, honor, and calendar.  The fatal concert becomes woman, music, international, terrorist, explosion, death, and injury.  After breaking the other search terms down into themes, these are translated into an archetypal “language” of 8 words or categories which allows the terms to be added together.  The final results are entered into an algorithm called the MarketMood Indicator (MMI) which gives the expected market change in August from the May source data.

The general mood conveyed by these terms together is one of strong emotions, and often panic.  Yet, there is added complexity for this particular month.  Every so often the mood and its effects become inverted.  This inverted condition has been the case for many months.  It just so happens that in August, this inversion is expected to “flip.”  Before August even began, our analysis showed that at some point during the month, an overall social mood of denial in spite of facts (this is the flip expression of the panic pattern), should flip to something much more intense.  This would make it a month where people who have been in denial about a problem are suddenly faced with it loudly, brightly, and undeniably.  If this flip is more gradual throughout the month, both large short covering rallies and sharp sell offs are possible as buyers and sellers deal with a background of strong, shifting emotions.

To see how the August mood is distributed geographically in the U.S., see our latest United States MoodMap, Is August Panic Time for the United States?

The chart below is the output of the monthly stock market MMI.  The mood generated forecast line which has been in a steady climb since early 2016, can be seen at the right of the chart to be doing something different than it has been for so long.  While the stock market may take a slightly different shape from what is shown here, we can now observe a July-September "double top" in sentiment followed by an October “lower low.”  This is the first lower low to show up in the entirety of this monthly chart which goes back to March 2016.  The month of August 2017 should bring the initial jolts that allow such a long, powerful, and steady uptrend to pause and decline, at least for a few months.

Chart: Monthly MarketMood Indicator vs S&P 500. 

The month of August is likely to be unusually full of emotional ups and downs. There have been many news stories of late that can be considered irrational, but this month may mark unexpected new extremes.   The mood pattern for the month of August taken as a whole, suggests a theme of strong emotions, irrational decisions, delusion, and even panic.  The stock market should reflect this background context, and make linear, “rational” or fundamentals based trading nearly impossible to succeed at—in other words, the market movements may make little sense to any reasonable person.  Most importantly, August is heralding a change from the status quo.  While it may not mark the final top of this long rally, as has already been seen after the first week and a half, it should be a jolt to the market, and wake up the sleeping VIX, at least for a moment.

However, just when everyone is assured that things are as bad as they can get, people may be surprised to learn that it’s not the end of the world after all.  Recall the market forecast chart above.  When August’s emotional roller coaster has finished its task, the market will rise again, and the VIX will fall.  This stubborn bull market will not roll over and die without a heck of a fight, and from the mood generated forecast chart, it doesn’t appear quite ready to stop fighting.

At MarketMood.net, daily search trends are converted to expectations of market movement in the S&P 500, gold, crude oil, and the U.S. dollar.  We issue daily and weekly reports, and discuss trade possibilities in our live trading room.