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Investor emotion alone forecasts the stock market, averaging 27% per year for the last 50 years with 1/2 the risk of the S&P500.  Here's how:

You might ask; what kind of proof exists, that emotions are so strong?  If emotions come into play we would expect that investors are feeling more optimistic after the market closes up, verses a day the market closes down. Let's look at the last 50 years of trading 1950-2000. If you had held the S&P500 index for the last 50 years, the return would have been 491%.

Now lets look at the day after the market closed up and the day after the market closed down, separately. We take the sum of the next day’s percentage change not counting for dividends and commissions or compounding. Buying after up days returned 875%. Buying on up days and selling short after down days returned 1,265%. If you add in compounding, the holder (buy and hold) of the S&P index would have gone from $100 in 1950 to $8,390 by October 2000. The emotional trader would have gone from $100 to $19,592,300. The difference looks enormous but it is only a compound annual rate of 27.1% verses the S&P500 50-year rate of 9.1%, about 3 to 1!  If you want to check this yourself, you can go to and download their historical market data.

The worse loss for the long term holder of the S&P index occurred in 1973-1974 with a drop of over 48% and a recovery period of over 7 ½ years. The emotional trader’s worse drop was about half (24.7%), it occurred in 1984 with a recovery period of over 2 ½ years about 1/3 of that of the long-term investor. It is interesting to note that the worse cases did not coincide with each other indicating that some synergy may exist by combining long-term investing and the right emotional based program, see our investment programs.

It is also important to point out that trading in this particular manner, in that time period, was impossible and this exercise, although theoretically correct, is just to show that emotion has a large effect upon the stock market. Emotional force isn't the only force acting upon the stock market, but it is a strong force and should be recognized.

Our program utilizes the power of the emotional element, but not in it's simplest form.  We might have a "buy" signal after a down day or a "sell" signal after an up day. The raw emotional element is only one part of the package. 


The less a man knows about the past and the present,
the more insecure must be his judgment of the future.


Sigmund Freud