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Robert R. Prechter
2014 IFTA ConferenceLondon, EnglandOctober 11, 2014
Socionomic Theory:an Alternative to EMH and a Foundation for Technical Analysis
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EMH is elegant and internally consistent.
It is not externally consistent.
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Essence of EMH:
1) External cause2) Rational reaction
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Do interest rates move the stock market?
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1999-2014 Robert Prechter www.socionomics.net Figure 4
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1999-2014 Robert Prechter www.socionomics.net Figure 5
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1999-2014 Robert Prechter www.socionomics.net Figure 6
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1999-2014 Robert Prechter www.socionomics.net Figure 7
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Does war affect the stock market?
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1999-2014 Robert Prechter www.socionomics.net Figure 9
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1999-2014 Robert Prechter www.socionomics.net Figure 10
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1999-2014 Robert Prechter www.socionomics.net Figure 11
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1999-2014 Robert Prechter www.socionomics.net Figure 12
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What about peaceful times?
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1999-2014 Robert Prechter www.socionomics.net Figure 14
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1999-2014 Robert Prechter www.socionomics.net Figure 15
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Do political parties affect the stock market?
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1999-2014 Robert Prechter www.socionomics.net Figure 17
Since 1857, the stock market's average annual gain has been approximately equal under Democrat and Republican presidents
Average annual return under Democrat presidents: 7.2%Average annual return under Republican presidents: 5.9%
With 1929-32 omitted, Republican average is 7.7%
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What about “oil shocks”?
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1999-2014 Robert Prechter www.socionomics.net Figure 19
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1999-2014 Robert Prechter www.socionomics.net Figure 20
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1999-2014 Robert Prechter www.socionomics.net Figure 21
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What about terrorist attacks?
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1999-2014 Robert Prechter www.socionomics.net Figure 23
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1999-2014 Robert Prechter www.socionomics.net Figure 24
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Does inflation make gold go up?
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1999-2014 Robert Prechter www.socionomics.net Figure 26
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1999-2014 Robert Prechter www.socionomics.net Figure 27
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Does QE make gold go up?
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1999-2014 Robert Prechter www.socionomics.net Figure 29
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1999-2014 Robert Prechter www.socionomics.net Figure 30
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1999-2014 Robert Prechter www.socionomics.net Figure 31
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Conclusion: Exogenous factors do not
regulate financial markets.
Data from the real world are inconsistent with EMH’s
causal claim.
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1999-2014 Robert Prechter www.socionomics.net Figure 34
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1999-2014 Robert Prechter www.socionomics.net Figure 35
Social mood is an unconsciously shared motivational impulse arising from social interaction independently from events.
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1999-2014 Robert Prechter www.socionomics.net Figure 36
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The stock market is a meter of social mood.
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1999-2014 Robert Prechter www.socionomics.net Figure 38
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1999-2014 Robert Prechter www.socionomics.net Figure 39
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1999-2014 Robert Prechter www.socionomics.net Figure 40
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1999-2014 Robert Prechter www.socionomics.net Figure 41
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1999-2014 Robert Prechter www.socionomics.net Figure 42
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1999-2014 Robert Prechter www.socionomics.net Figure 43
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1999-2014 Robert Prechter www.socionomics.net Figure 44
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1999-2014 Robert Prechter www.socionomics.net Figure 45
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1999-2014 Robert Prechter www.socionomics.net Figure 46
posted at ssrn.com
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1999-2014 Robert Prechter www.socionomics.net Figure 47
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1999-2014 Robert Prechter www.socionomics.net Figure 48
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In none of these cases does either variable control the other.
A hidden variable—social mood—controls both.
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The character of lagging social actions is highly predictable.
News doesn’t predict the stock market;
the stock market predicts the news.
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1999-2014 Robert Prechter www.socionomics.net Figure 51
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The Socionomist
www.socionomics.net
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Socionomic Theory of Finance
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The Price/Demand Dichotomy in Economic
vs. Financial Markets
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1999-2014 Robert Prechter www.socionomics.net Figure 55
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1999-2014 Robert Prechter www.socionomics.net Figure 56
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1999-2014 Robert Prechter www.socionomics.net Figure 57
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1999-2014 Robert Prechter www.socionomics.net Figure 58
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1999-2014 Robert Prechter www.socionomics.net Figure 59
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1999-2014 Robert Prechter www.socionomics.net Figure 60
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The Equilibrium/Dynamism Dichotomy in Economic vs.
Financial Markets
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1999-2014 Robert Prechter www.socionomics.net Figure 62
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In economics, relative pricing also seeks equilibrium and
is fairly stable.
One price is a benchmark for another.
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In the stock market, there are no useful benchmarks of value.
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1999-2014 Robert Prechter www.socionomics.net Figure 65
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1999-2014 Robert Prechter www.socionomics.net Figure 66
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1999-2014 Robert Prechter www.socionomics.net Figure 67
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1999-2014 Robert Prechter www.socionomics.net Figure 68
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1999-2014 Robert Prechter www.socionomics.net Figure 69
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1999-2014 Robert Prechter www.socionomics.net Figure 70
The Elliott Wave Model of Financial Price Fluctuation
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1999-2014 Robert Prechter www.socionomics.net Figure 71
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1999-2014 Robert Prechter www.socionomics.net Figure 72
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How the Elliott wave model relates to bubble theories.
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1999-2014 Robert Prechter www.socionomics.net Figure 74
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1999-2014 Robert Prechter www.socionomics.net Figure 75
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1999-2014 Robert Prechter www.socionomics.net Figure 76
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1999-2014 Robert Prechter www.socionomics.net Figure 78
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1999-2014 Robert Prechter www.socionomics.net Figure 79
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1999-2014 Robert Prechter www.socionomics.net Figure 80
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The only sub-group that does not consistently herd is the
“Commercials”.
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1999-2014 Robert Prechter www.socionomics.net Figure 82
Bubbles are not rational.Crowds are not wise.
The herding impulse is a blunt tool of survival, maladapted to finance.
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1999-2014 Robert Prechter www.socionomics.net Figure 83
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1999-2014 Robert Prechter www.socionomics.net Figure 84
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1999-2014 Robert Prechter www.socionomics.net Figure 85
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1999-2014 Robert Prechter www.socionomics.net Figure 86
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EMH asserts that economic laws rule finance.
STF proposes that financial laws govern finance.
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1999-2014 Robert Prechter www.socionomics.net Figure 88
Contrasting Models of FinanceEfficient Market Hypothesis (EMH) Socionomic Theory of Finance (STF)
1. Objective, conscious, rational decisions to maximize utility determine financial values.
1. Subjective, unconscious, prerational impulses to herd determine financial values.
2. Financial markets tend toward equilibrium and revert to the mean.
2. Financial markets are dynamic and do not revert to anything.
3. Investors in financial markets typically use information to reason.
3. Investors in financial markets typically use information to rationalize mood-induced imperatives.
4. Investors’ decisions are based on knowledge and certainty.
4. Investors’ decisions are fraught with ignorance and uncertainty.
5. Exogenous variables determine most investment decisions.
5. Endogenous social processes determine most investment decisions.
6. Financial prices derive from individual decisions about value.
6. Financial prices derive from trends in social mood.
7. Financial price changes are essentially random.
7. Financial prices adhere to an organizing principle at the aggregate level.
8. Financial prices are unpredictable;the character of news is unpredictable.
8. Financial prices are probabilistically predictable; so is the character of news.
9. Changing events presage changes in the values of associated financial instruments.
9. Changing values of financial instruments presage changes in associated events.
10. Economic principles govern finance. 10. Socionomic principles govern finance.
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STF is elegant and internally consistent.
It is also externally consistent.
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Most “fundamentals”are results, not causes.
Mood change is causal.It is also patterned,
providing a basis for technical analysis.
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Slides available at:
www.socionomics.net/wave/14IFTA