Cheerleading time! Sure, there's terrible news, and we're facing tough times. But we will get through it – together!

Feel better? Likely not. Don't worry – that's normal. Humans are wired to be negative. Psychologists call it negative bias. Just look at news. Nobody wants to see stories about kids helping the elderly cross the street. Sadly, viewership spikes with a tragic accident taking out a pedestrian. 

It's a fact – bad news sells. Good news doesn't. I just spoke to someone who hired an ex-TV news producer in one of the top five largest U.S. cities. When asked about what grabs viewers, she said that the joke around the newsroom was:

"You gotta lead with the nuts, guts, or sluts. The nuts are the crazy people who do shocking things. The guts are the tragic accidents and murders. The sluts … well, I think you can figure that out – scandal! Any of those is the hook, and then you can try to deliver some facts." Is it any surprise then that the world is glued to the news, which is like drinking from a firehose of Debbie Downer?

Recent experimental studies show that emotions can have a significant effect on the way we think, decide, and solve problems. There is plenty of science that backs this up. Here are just a few bullets:

  • This Psychology study cleverly titled "How emotions affect logical reasoning: evidence from experiments with mood-manipulated participants, spider phobics, and people with exam anxiety" speaks volumes. The experiment had people take intelligence tests. Only, their emotional state was altered by giving them feedback that they performed excellent, poor, or average. Then they had to solve problems. Results showed a clear effect of emotions on reasoning performance. Participants in negative mood performed worse than participants in positive mood, but both groups were outperformed by the neutral mood reasoners.
  • A few years ago, Facebook conducted a secret, controversial study. It published details of the experiment in which it manipulated information posted on 689,000 users' home pages. Facebook found that it could make people more positive or negative through a process of "emotional contagion." One test reduced users' exposure to "positive emotional content," resulting in fewer positive posts of their own. Another test reduced exposure to "negative emotional content," and the opposite happened. The study concluded: "Emotions expressed by friends, via online social networks, influence our own moods, constituting, to our knowledge, the first experimental evidence for massive-scale emotional contagion via social networks."
  • This March 18 Medium article by Dr. Eugene K. Choi sums it up nicely: "The FEAR of the Coronavirus is deadlier than the virus itself." Fear activates the amygdala. That's part of your brain – it's your fear processor and involves your emotions. Fear puts you in a fight-flight-freeze response (toilet paper). When the mind goes fight-flight, the body dumps cortisol to help handle stress. But cortisol weakens your immune system, so staying in a prolonged fight-flight actually makes us more susceptible to getting sick. Thus, being afraid of dying from coronavirus actually increases the chance of a bad outcome if you get it. Fight-flight also makes us selfish and somewhat illogical.

We see emotional pitfalls in markets too. With strong markets, many are still bearish (negative). With weak markets, most are extremely bearish. Usually, markets do well after periods of bearish sentiment, especially extreme negativity. The time to watch out for is really when everyone is bullish.

To summarize:

  1. We're wired to be negative. 
  2. The news panders to that.
  3. Negativity hampers performance, decision making, and our physical health.
  4. Extreme bearish sentiment usually precedes higher market prices.

You should know that I hate news, struggle with emotional responses in investing, and am data-driven. So, what does the data say for stocks?

  • The Big Money Index is rising lightly simply because selling is slowing. Those monster liquidations we saw are in the rear-view mirror for now.
Chart showing the performance of the Russell 2000 index and the Big Money Index
  • Sector sell signals clearly show that the rate of selling is slowing dramatically. (If the red line decreases, selling decreases.)
Charts showing Big Money Sell Index by sector
  • The following charts show a similar story in the industrials, information technology, materials, and real estate sectors.
Charts showing Big Money Sell Index by sector
  • You can see a huge fall-off of signal counts from prior weeks to last week.

March 15, 2020

Table showing weekly unusual institutional (UI) buy and sell signals by sector

March 22, 20

Table showing weekly unusual institutional (UI) buy and sell signals by sector

March 29, 2020

Table showing weekly unusual institutional (UI) buy and sell signals by sector

April 5, 2020

Table showing weekly unusual institutional (UI) buy and sell signals by sector

The data supports the conclusion that a near-term bottom has been put in. That's not popular. I recently had a 30-minute interview saying so, and the comment section blew up with angry bears. So be it. I go by numbers, not emotion. Now, this data isn't an all-clear signal – it's just some positive data in a sea of red. The data is far less violent than prior weeks, which is a good sign.

Could we retest the lows? The data doesn't show it coming in the near term. Emotion says "Absolutely." But the world is a very negative place right now. I feel it too. But my job is to present data.

The data also tells me to tell you: Hang in there people – we will get through this together. Hopefully, the slowing of selling is pointing to light at the end of the tunnel.

Emotion is great for love – not for investing. The news will always be bad because that's what sells. It's also heavily biased – left or right, but all for-profit. But imagine if we had state-run media – no one would believe it.

Then I realized that the only way to get real factual news is to have computers gather all news and assemble unbiased representations of stories. I told my wife: "Honey, if I can look at markets through the unbiased lens of data, why not create a data-driven news service? You take Breitbart, The New York Times, and everything in between on each subject and then blend it with algorithms in a data form with flags for how it leans left or right of center. It's all machine learning and AI – a data-driven media company! Left spin cancels right spin!"

My wife’s reply: "That's brilliant! Only, the right and left take facts, spin them, and pour on emotion. If you remove the emotion, you're just left with the facts. It won't work because people like to be told what to think."

The Bottom Line

We (Mapsignals) are bullish on high-quality U.S. equities in the long term, and we see moments like these as areas to pick up great companies. 

Disclosure: The author holds no positions in any mentioned securities at the time of publication.