In 2006, there was a famous psychology experiment on how Chinese investors think.
The results revealed a significant cultural difference between American and Chinese investors.
And understanding this could have some pretty big implications for you right now.
In the experiment — published in Economic Research August edition — 285 Chinese investors were shown financial and stock charts in trends — up or down — and asked what they think would happen next.
To be clear the charts were made up, so no one knew beforehand the ‘real’ answers.
The study found that most Chinese investors think a stock will go down, the longer it has been going up. And more willing to guess it will go up, the longer it has been going down.
These results are very interesting because they are in direct contradiction to similar studies of US investors.
Previous experiments in the US found the majority tend to follow the trend the longer it has been going on due to social effects. The so-called herd instinct was strongest.
It’s why market bubbles in Western markets frequently end with one last huge move up before they crash.
So, shown the same charts as their Chinese counterparts, American investors are more likely to say the trend will keep going, rather than reverse like their Chinese counterparts.
As I said before this psychological insight could be a clue for what happens next in the markets.
Let me explain…
Why we could see a huge boom in the US and Chinese markets
The results were partially explained by the psychologists as being due to the cultural beliefs of each nationality.
The Chinese belief in balance — famously represented by the idea of yin and yang — dominates their thinking.
What goes up, must come down and vice versa.
In economics this is known as the ‘gambler’s fallacy’, the belief that the odds must even out in the end. When in actual fact each new spin of the wheel has the same chance of hitting red or black as the last spin.
The Americans on the other hand are affected more by what economists call the ‘hot hand effect’. It’s named after the observation that basketball players go through shotting streaks where it seems they just can’t miss.
Short-term results dominate their thinking.
If that psychology continues to ring true, we could be about to see a huge boom in both the US and Chinese markets this year.
But due to two very different chart patterns.
Let’s look at the charts to see why…
Source: Incredible Charts
This is the 20-year chart of the main US stock index, The Dow Jones Industrial Average, on a monthly basis.
As you can see despite the recent price falls, the long-term trend is very much up since 2009.
US investors might be a little bit shaky right now with the recent falls, but with such a strong trend still in play, it won’t take much for them to jump back in.
Remember the longer a trend has been going on, the longer US investors think it will keep going!
Let’s look at the Chinese stock market to see what that looks like over the same time frame…
Source: Incredible Charts
You can see the yin and yang of the Chinese markets playing out perfectly over the past twenty years.
But underlying it you can see a gradual supporting up-trend. Interestingly, each time the market hits this support line, it then goes on for a huge run in the opposite direction.
That point has just been hit.
I call it the ‘Chinese Slingshot’ and it could be a key moment for traders. At the very least it might be a signal that the bottom is in for Chinse markets.
A further indicator adds weight to the chance that ‘the bottom is in’ for all global markets.
Check this chart out:
Source: Meryl Lynch
This chart shows that more money was frightened out of the global markets in the past six weeks than at any time since 2008. Historically this is a technical indicator of market bottoms — a capitulation of weak hands.
Be ready for action
I don’t know about you, but moments like this are what I live for trading wise.
That point in time when the stars align.
Psychology, technical indicators and economic fundamentals are all pointing to a move higher soon.
So, despite all the doom and gloom talk, I’d be ready to act quickly if I were you.
In these conditions a surprise upwards move could be explosive.
Contributing Editor, Money Morning
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