Positive Sentiment Override

In his bestselling book “Blink,” Malcolm Gladwell tells the story of John Gottman, a psychologist who has uncovered the “Mathematics of Divorce.” By observing married couples for an hour and quantifying their verbal and physical cues, Gottman is able to predict with 95 percent accuracy whether a couple would still be married fifteen years later. One of Gottman’s key findings was that for a marriage to survive, the “ratio of positive to negative emotion in a given encounter had to be at least five to one.”

Gottman found that people can be in two states in their marital relationship. The first is what he calls “positive sentiment override,” where their positive emotion overrides any irritability. In this state, one spouse will do something bad and the other spouse will say something to the effect of, “oh, he’s just in a crummy mood.” The other state is “negative sentiment override,” where even a relatively neutral thing that one spouse says gets perceived as negative by the other partner.

In the book, Gottman draws a graph that tracks the ups and downs of a couple’s level of positive and negative emotions over time. After charting these ups and downs Gottman notes that “it doesn’t take very long to figure out which way the line on the graph is going. Some go up, some go down. But once they start going down, toward negative emotion, ninety-four percent will continue going down.”

As a market participant, does any of this sound familiar?

It should, as sentiment is the single most important driver of returns in the short run (Ben Graham’s “voting machine”). Gladwell remarked that Gottman’s graphs looked “a lot like a chart of the ups and downs of the stock market.”

In the current stock market, it is abundantly clear which of the two states we are in: positive sentiment override. In fact, one could easily argue based on the record S&P 500 streak above its 200-day that we are in the longest period of positive sentiment override in the history of markets. The streak has created a powerful positive feedback loop where the buying of any minor dip has been quickly rewarded with a new high. This, in turn, emboldens market participants more and more each time.

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All news, even bad news, is being perceived as positive by the markets or at the very least ignored. Since November 20, 2012, the equity market has been given the benefit of the doubt in each and every case. And there has been no shortage of events that in most other times would have been perceived as negative and led to a more significant correction:

  • The Fiscal Cliff
  • Boston Marathon bombings
  • Syria
  • Taper Talk and The Interest Rate Spike
  • The “Fragile Five” Emerging Markets “Crisis”
  • The Federal Government Shutdown
  • Obamacare roll-out debacle
  • Ukraine
  • Iraq
  • Negative GDP

This is just a small sampling of negative headlines but the message is clear. Market participants have had a persistent glass half full attitude. None of these negative headlines were enough to deter their optimism.

Non-Farm Payroll Report:

The most publicized of economic data points, the non-farm payroll report, tells a similar story. Since the 200-day streak began, we have seen both beats and misses in the report. Positive sentiment override has been the dominant factor in the report. When a report has come in below expectations, market participants would cheer the continuation of QE and 0% interest rates. When a report came in above expectations, market participants would cheer the improvement in the economy. The average return (0.48%) and % of positive (84%) non-farm payroll days have been significantly higher than all trading days during the streak, setting a positive tone to start most months.

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What event or data point will cause their attitudes to eventually change?

No one knows, and it is entirely possible that such a shift could begin with tomorrow’s report. But as Gottman argues and we have seen, it can be really difficult to change these states, especially when they are entrenched in investors minds as they are today. This is precisely why trends exist in markets and momentum is a market anomaly that has persisted over time.

But we also know that trends don’t last forever and mean reversion is the one constant in all markets. The best about spotting an upcoming change in trend is to watch for a change in the prevailing sentiment. We’ll know that sentiment is finally changing when the market starts to sell off on what would otherwise be considered good or neutral news. But until that shift occurs, enjoy this historic environment on this fourth of July with a beverage of your choice. And when you look down after a few sips, remember that in life and in markets, it often pays more to view that glass as half full.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.


Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts.  He is the co-author of two award-winning research papers on Intermarket Analysis. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors, an institutional investment research firm. Previously, Mr. Bilello held positions as an Equity and Hedge Fund Analyst at billion dollar alternative investment firms, giving him unique insights into portfolio construction and asset allocation.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University. He also has a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.


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