Bulls Look to ‘Win the Crowd’

As part of our strict quarantine in Virginia, I am watching classic movies again for some analogous direction in my weekly take on current market conditions.

As far as data is concerned, investors are still flying blind. All information crossing the tape is through the rear-view mirror.

However, one of the most accurate indicators of whether a market is forming a bottom is when bad news stops resulting in big declines and up days are marked by swelling volume. A bottom is also defined by when the herd mentality undergoes a big shift.

In one of the great all-time movies, Gladiator, of all the memorable lines in the script, none stands out more than “Win the crowd, and you will win your freedom.” Oddly enough, there is real truth in this simple statement when applied to floor traders at the NYSE on Wall Street (aka the mob in the Roman Coliseum).

Actor Oliver Reed played the character Antonius Proximo, a gruff, old gladiator trainer who buys Maximus in North Africa. A former gladiator himself, Proximo was freed by Marcus Aurelius and becomes a mentor to Maximus. This was Reed’s final appearance before he died during the filming from a heart attack, not from the scene when he is swarmed by sword-bearing Roman soldiers.

Having gone to great lengths this past weekend to produce a salient argument based on historical data to argue for a sustained stock market recovery, I find myself going back to when I first started at Smith Barney in 1984 and coming forward today, asking what was the catalyst that had as much to do with triggering a sudden and powerful turn higher for stocks. It was the same thing then that still exists today — herd mentality.

Per Wikipedia as to what causes herd mentality: Driven by emotional reactions such as greed and fear, investors can be seen to join in frantic purchasing and sales of stocks, creating bubbles and crashes. As a result, herd behavior is closely studied by behavioral finance experts in order to help predict future economic crises.

On Wall Street, “the crowd” mentality usually starts at one trading post, of which there are several, representing each sector of the market and some sub-sectors. Having been on the floor of the NYSE during the last hour of trading with a floor specialist buying and selling millions of shares of stock into the close, I was a bit awestruck by the time the closing bell rang. The experience was truly scintillating.

Being fully aware that this column is read by thousands of ultra-bright investors and market professionals, if you haven’t spent time on the floor, then you owe it to yourself to somehow make it happen. For the first time, I could see how just the smallest influence from one post ignites a spread of positive or negative feelings in a matter of a few minutes across the floor.

This pack mentality that changes the tone from bearish to bullish is very often triggered by the passing of information among a few traders that one of the 100 or so most influential pools of money in the world is stepping in with big buy orders. It only takes a matter of seconds to disseminate that information to their best accounts and fellow traders, which at that point starts to feed on itself.

In the case of the current trading landscape, it would involve the likes of Vanguard, Fidelity, Bridgewater Capital or Renaissance Technologies making a call on when COVID-19 new cases peak — and the word gets out fast because no one wants to fight the tape at this juncture — not after a 35% selloff in the S&P in the span five weeks. And not while that same 100 or so most influential pools of money are all watching each other like hawks.

The problem today is that, with the virus sending all floor traders into their digital caves, all trading is being done remotely. There are no traders on the floor of the NYSE. There is no professional human interplay that is part of what makes up the DNA of the market sentiment. We hear that all the time from Bob Pisani from CNBC, who is on the floor every day giving us his read of leading traders.

But rest assured, he only gets very limited information. Those floor brokers aren’t there to help Bob, you or me. They are there to execute massive block trades, most of which are done electronically, but still have everyone snapping their heads in the direction of the post where an abnormal amount of stock just traded and they all receive “push notifications” that large blocks are being traded to the upside.

So much has changed over the past 35 years that I’ve been trading the markets. Examples include algorithm technology, end-of-the-quarter portfolio rebalancing, high-frequency trading proprietary (“prop”) shops that invest their own capital and the advent of index funds and exchange-traded funds (ETFs). All have a role in the market’s make-up and daily fund flows. Human emotions of greed and fear emanate from a small but influential and well-informed circle of well-connected traders and their actions matter greatly.

When this herd mentality is convinced that the worst is over, it will come without any formal notice. There is no “herd index” that I know of, but likely one day in the not-too-distant-future when your screens turn bright green on no headlines, you’ll know that BIG-money with better information than we’ll ever have is establishing a pivot point.

And if you try to find out why, you’ll miss the first 10% of the rally. Will it happen this way again this time around? I have no idea. But Mr. Market has a very strong track record of changing sentiment on a dime and winning the crowd.