E-motions: Vol. No. 1, Issue No. 5, August 22, 2005

Brought to you by California News Tech (OTC BB: CNTE)

Crowd Reactions Lead to Irrational Exuberance

1. Emotions in Focus: The Madness of Crowds

One of the psychological phenomena that has always seemed the most shocking in hind sight and has led to the most dramatic events is when a crowd, rather than the individual makes decisions. If everyone is doing something, or if people think everyone is doing something, the group ends up making decisions that would appear as totally irrational coming from the individual. The actions and affirmations of others make it seem rational, however. In a phenomenon known as “group think”, when experts, such as financial analysts and market leaders, get together in an environment where there are not opposing view points, they can over-estimate the consensus behind an idea or opinion. Also, they desire to conform, trust the false-consensus of the group over their own intuitions and perceptions.

In investing in particular, a rush of enthusiasm on the part of either very public opinion leaders, or a critical mass of the investor community, can lead to even greater, potentially irrational exuberance. Such investor trends can be traced back as far as the Dutch tulip market of the 1600s. An initially worthless flower became a popular trend. The Dutch watched as the trend took off first with the elite of their society, and soon everyone felt that they too had to buy the bulbs. Eventually, the tulip trade replaced almost the entire economy of the Netherlands, going up and up in value. Until finally, within a few week period, the tulip market went from its heights to crashing. All at once, the society had begun to question the real value of tulips and the sustainability of market prices. While the first tulip naysayers had been patently ignored, the lingering fears of investors remained, and they all decided to be prudent and take a profit on their investments all at once. As larger and larger numbers of people began to sell of their interests in tulips, wide spread panic began, and prices continued crashing. At that point, the bulbs became virtually worthless again. It was as if the crowd had suddenly recovered from its madness and could not believe how previously they had all valued tulips so much.

Such episodes of irrational group behavior can also be seen in recent financial news. Last week Google, Inc. (Nasqaq: GOOG) was in the news, with the media exhorting the internet company to “be more evil”. Playing on the Google company motto, “Don’t be evil,” journalists reported that despite Google’s plans to sell off billions in shares and allegedly invest in major development in China , it may not be to maintain expected profits indefinitely. Specifically, commentators suggest that Google may not be able to sustain its success solely by operating a search engine. Furthermore, expansion rumors are far from definite, and Google already faces Yahoo as a major competitor in China .

Ultimately, experts are beginning to question whether or not Google can continue to thrive solely on search-based ads instead of so-called “evil” practices such as hosting fee based advertiser listings and intrusively collecting clients’ personal information.

Especially with Google, Inc. (Nasdaq: GOOG) issuing 14.2 million new shares of its stock, investors must ask if the company can continue to meet the sky-is-the-limit expectations many people have. Also in question is why Google, in particular is the target of such irrational exuberance, and why many investors continue to ignore warnings that Google may be overvalued. In general, the kinds of stocks that attract Renaissance tulip craze levels of enthusiasm have a number of characteristics in common. These qualities, many of which Google shares, include heavily-hyped IPO releases, companies or products with a glamorous youthful image, and unprecedented ground-breaking business models. Time and again, these alluring traits have attracted crowds and inspired imaginative speculation.

2. The Big Movers and Why

Last week there was an above average number of stocks who were “big movers”, or stocks which changed a large percent in value in the direction predicted by MediaSentiment Heads Up™ recommendations, based on the sentiment behind company quarterly reports. Although the Nasdaq was down most of last week and the Dow seemed volatile and indecisive, there was an especially large number of big movers in the positive direction. Despite conflicting market signals, when companies released positive earnings news, investors wanted to act. In addition to unusually large price increases on good news, last week over all, the trading volume for MediaSentiment Heads Up™ stocks was 429.61% over the stocks’ three month average.

The emotions behind this irrational exuberance may have to do with overall positive feelings about the direction of the economy, technology in particular. For instance, stocks that went up big this week on positive news included GameStop, Corp. (NYSE: GME), which produces video games, Blue Coat Systems, Inc. (Nasdaq: BCSI), which protects e-mail accounts against spam, and Astro-Med, Inc (Nasdaq: A LOT), which produces high tech. instrumentation and testing and printing equipment for medical and scientific research. Perhaps the popular Google juggernaut is restoring some of wistful investors’ positive sentiments about the tech. industry and all of the profit and progress it used to stand for during the late nineteen nineties.

3. How to Use the News

There is no accounting for taste, and it can be very difficult to predict which hot new companies or buzz-worthy news stories will inspire irrational exuberance on the part of investors. Nonetheless, it is still important to keep abreast of such trends using research tools such as MediaSentiment Trend™ to track the mention of different stocks in news and opinions.

Understanding when buzz is starting to occur can help investors make money before a stock shoots up in value. Understanding when the crowd is about to leave from the side of an investment trend, however, is perhaps more important. While the steam behind such investment crazes can seem to escalate very quickly, they deflate even more rapidly.

Do not ignore the early voices of dissent. These are your warning signals that prevent you from becoming greedy or complacent and getting out when it is already too late. There will always be other voices claiming there is no reason to abandon an investment trend just yet, but the very idea of doubt within the group is sometimes enough to spark an unexpected stampede in the other direction.

4. Last Week in Media Sentiment

Last week's correlations between MediaSentiment.com's thumbs up / thumbs down recommendations for Heads Up rated companies and subsequent trading volume show a strong relationship. The correlation between ratings for MediaSentiment.com selected stocks and their increased trading volume the next day over their three month average is 90%, explaining a vast majority of the variation in volume. Correlations between MediaSentiment.com's thumbs up / thumbs down recommendations for Heads Up rated companies and subsequent stock price show an even more powerful relationship. The correlation between ratings for MediaSentiment.com selected stocks and their highs and lows the next day is 80%, explaining a majority of the variation in highs and lows. Therefore, this week, MediaSentiment™ gave an edge up to 90% to smart investors who used Heads Up™ recommendations to trade on volume, and an 80% edge to investors trading on intraday highs and lows!

All figures reflect all MediaSentiment Heads Up™ recommendations for the week of August 15, 2005 through August 19, 2005, rating companies on the day of their quarterly earnings releases correlated with their stock highs, lows, closing prices and daily volumes for the subsequent day.

5. Links you can use

Definition of irrational exuberance

Google needs to be more evil

Google one year after IPO to sell 4 billion share

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