What is the Elliott wave principle?
In the 1930s, Ralph Nelson Elliott published his theory that financial markets unfold in recognizable patterns, or waves, and price changes reflect changes in investor psychology.
This psychology swings from pessimism to optimism, and back, in a natural sequence. This, he said, makes the waves specific and more measurable.
These wave patterns can unfold at all points in the markets, from a few hours to a few decades or even longer.
In February of 1964, the Beatles were at the top of the record charts, accounting for 60 percent of all record sales.
But it wasn't enough that the band was made up of four cute boys from Liverpool, England, who knew how to write a catchy tune. At the same time, the stock market was seeing record gains, giving the entire country a sense of blissful euphoria.
This put Americans in such a good mood they felt like going out and buying some pop music.
The music trends in the 1960s show the correlation between the stock market and pop culture - or, in general, the trends of Main Street and the trends of Wall Street - according to Gainesville research firm Elliott Wave International. Started 30 years ago by Gainesville resident Robert Prechter, the company looks through the lens of the Elliott wave principle, a method of measuring investor psychology in waves. Over a certain period of time, mass psychology can swing from pessimism to optimism and back again, and these patterns create the basis for the Elliott wave principle.
Part of what the company does is report its analysis of the stock market, producing newsletters for its base of international subscribers. But it also reports on trends that go on in everyday society, looking at how social mood results in social actions. A new monthly publication, The Socionomist, is dedicated to analysis of cultural trends.
Euan Wilson and Matt Lampert are two of the trend watchers in Elliott Wave's sister office, the Socionomics Institute. They said part of their job involves identifying developing social trends and forecasting how those trends will change in the future.
And if you're watching the stock market, these trends could hold clues to whether it might go up or down.
Take fashion, for example.
In a bear market, like we're in right now, people get more conservative. So, they dress better, too, opting for suits versus more casual wear.
"They want the jobs," Wilson pointed out.
A dry-erase board in their office spells out possible trends they're researching, looking for evidence to back it up before publishing their findings for news service subscribers.
"The main thing that we look at is social trends - what's popular on television, what movies are people going to see, what's going on in politics right now - and how does that reflect the same sentiment, the same mood, that's driving what the market's doing," said Lampert. "So usually when the market's going down people are upset; they're angry. So they go to see more horror movies and listen to punk rock and that kind of thing.
"And then when the mood's good people are having a great time, the market's going up, Disney movies are popular, they're listening to pop music."
Wilson said the process involves first getting an idea about a possible social trend, then relating this to a market forecast to help determine the social mood and then looking for data to start charting the trend.
That research recently led him to a new show on HBO, "True Blood." "I was doing a study on HBO and Showtime, and HBO was in the tank, subscriber wise, for about three years. And I was looking at a new show they were launching last year, that ‘True Blood' vampire show," he said. "And people become fascinated with the mystical and the magical in a declining social mood, and so I thought very likely the show is going to do well. And it is the highest-rated program for the season premiere since they took ‘The Sopranos' off the air."
A trend industry
There are companies across the country using various methods of predicting trends, mainly so their clients know how a certain product may fare or how consumers may react to a new product.
Richard Leslie, president of the Atlanta-based trend-watching company Trend Influence, said his staff looks at multiple variables when trying to predict a trend. Researchers include an anthropologist, branding specialists and graphic designers.
"Ours is very irritative, so what we would do is we would take the stock market as a secondary source, like anything else we could get - any reports that have been published - as secondary data sources and we bring those into an analysis," Leslie said, adding that the idea of using financial markets to analyze social trends sounded like an interesting idea.
"What we like to understand is why things happen, and part of that is observing trends. If there's a manifestation of behavior, we try to get to what drills the behavior," he said. "And we do that for clients by saying that this behavior is happening, it's affecting your business, let's find out why and see if there's something that we can either affect it or plan for it."
An economic bond
Elliott Wave senior marketing manager Will Rettiger said the idea that Wall Street and what's going on in pop culture could be linked is hard for some to swallow, especially when people who follow the stock market are used to simply watching how much the markets have gained or lost in a single day.
But in terms of stock analyzing, the pattern analysis that goes on at the Gainesville office applies to our society in general, not just the markets.
"It says that the same things that are driving the stock market prices up and down are the same things driving trends in fashion, from conservative to extravagant," Rettiger said. "And it's all rooted in our mass psychology. So, our propensity to wear edgy clothing, more racy clothing, or to watch feel-good movies and listen to Britney Spears-type music also happens to coincide with our willingness to buy stocks."
And then, the pendulum can swing the opposite way.
"If the movies are on a downswing and people are more pessimistic and are into more dark movies, slasher movies, Disney movies won't fare as well. You'll hear darker music and stock market prices will come down."
Company founder Prechter began studying the theories of Ralph Nelson Elliott more than 30 years ago, Rettiger said, when Prechter found Elliott's original writings in the New York Public Library. In 1978, Prechter co-authored what is considered the definitive Elliott wave text, "Elliott Wave Principle - Key to Market Behavior," and today can be called one of the world's experts on the Elliott wave principle.
It was one of Prechter's articles in a trade journal from the 1980s that sparked the interest of Pete Kendall, now an analyst for the firm. The article was making the connection between movies, music and fashion and the stock market - even predicting that neon colors would be the next trend in art - and it struck a chord, Kendall said.
"What I liked about it was, you could get the textbook and there's a methodology to it. It wasn't like his secret formula, it's like an approach that's open to anyone who's open to studying it and hopefully it works for you, and for me it did," he said. "Along the way he's kind of developing the idea that markets are more broadly applicable to people's lives - that what takes place in the stock markets has relevance not just to Wall Street but Main Street.
"I saw that and I found that compelling," he added. "Whatever happens in the stock market happens in the supermarket. ... For instance, you can see how ‘E.T.' fit into a market event."
Fellow analyst Steve Hochberg said while the job could be defined as trying to look into the future - which, ultimately, is unknowable - they're trying to get just a peek.
"It's a challenge, what we do," he said. "I think the secret is that Gainesville, Georgia, is where some of the most cutting-edge work is being done on financial theory.
"It's going to get out there, what we're doing here. What Bob (Prechter) is doing is the future of what's going to be happening on Wall Street, and it's pretty exciting."