Jun 19, 2013

    Big spenders a sign of coming market slide?

    RECORD prices at art auctions in recent weeks and oversubscribed holidays by private jet are among the signals that a stock-market slump is approaching, if followers of behavioural finance are to be believed.

    To gauge the mood and likely impact on markets, behavioural analysts look not just at traditional measures such as investment polls and options, but also at social media - including Twitter and Facebook - and even developments in art and sport.

    The theory goes that people make bad decisions in moments of extreme fear or optimism, and that studying their behaviour may provide clues to where equities are headed.

    Now might be just such a moment.

    "Markets have either topped or will soon top, based on the behaviour I see outside of the markets, especially in art, (cars) and residential real estate," said Mr Peter Atwater, president and chief executive of Financial Insyghts.

    He noted that an Aston Martin car fetched a record US$4.85 million (S$6 million) at an auction last month, while a New York sale of Christie's post-war and contemporary art set 37 records last month, and holiday firm Abercrombie & Kent added a second departure to its 19-day tour of Africa by private jet after the first became sold out.

    Behavioural analysts term the 140 per cent rise in major indexes since 2009 the "rich man's rally", and say the behaviour of the uber-rich reflects peak-of-the-market sentiment.

    Their views are in sharp contrast with those of traditional analysts, who say an improving global economic outlook, along with better company fundamentals, will take indexes to new highs in the coming months.

    One non-traditional expert who accurately predicted the 2007 stocks bust and the recovery in 2009 is Mr Robert Prechter, whose Socionomic Theory of Finance suggests that social mood causes economic and political events.

    "Two dozen stock-market-sentiment indicators show record or near-record optimism, suggesting the stock market is a lot closer to a top than a bottom," said Mr Prechter, founder of the United States-based Socionomics Institute. "In the past century, at least, optimism this extreme has occurred only twice before, in 2000 and 2007."

    The S&P 500 index slid 50 per cent in two years - from August 2000 - after the dot-com bubble burst, and sank 55 per cent in 17 months from late 2007 as the financial crisis took hold.

    Several top global banks have been less keen to buy into the trend, saying it was hard to lay down strict rules on behavioural finance and that results were subject to wide interpretations.

    Some quantitative analysts reject the idea that markets are driven either purely by mood or purely by traditional factors, seeing the two in a symbiotic relationship.

    "I find the term 'socionomics' a bit pompous. However, I subscribe to the idea that social moods may govern events," said Mr Julien Turc, Societe Generale's head of cross-asset quantitative strategy. "I believe both things are the product of each other."