Crowd Psychology: Why Positive Factors for Individual Assets Fade Against a General Negative Background
Introduction: The Power of Mass Behavior
In financial markets, human emotions are the primary driver of price movements. Positive factors, such as strong quarterly earnings or successful new product launches, can boost stocks at the level of individual companies. However, when the overall sentiment turns bearish—due to geopolitical escalation or recession fears—investors often resort to a "sell first, ask questions later" mentality. During these moments, mass sentiment can suppress positivity, and even strong beneficiaries of fundamental news can be overshadowed by global sell-offs.
Professional asset managers understand that the market consists of 80% emotions and only 20% rational decisions. When a mass exodus from risk assets begins, logic gives way to the instinct for capital preservation. Even companies with impressive revenue and profit growth cannot withstand a liquidity drain initiated by institutional funds.
Fundamentals of Crowd Psychology: Emotions and Cognitive Biases
Fear and the Herd Instinct
Fear is the most potent emotion in the market. When capital loss threats arise (corrections, crises, geopolitical news), investors exit their positions en masse. This leads to a snowballing effect, where prices fall not due to any fundamental issues within individual companies, but due to widespread panic. Neurobiological studies show that under stress, the brain shifts into "fight or flight" mode, blocking analytical thinking.
A classic example is the crash of March 2020, when even stocks of companies benefiting from the pandemic (tech giants, pharmaceutical firms) lost 20-30% of their market capitalization in a matter of weeks. Zoom, which saw revenue grow by 300% year-over-year, fell from $150 to $100 per share, despite unprecedented user growth.
Greed and the Lag in Reaction
Greed drives market rallies, creating bubbles and asset overvaluation. However, as sentiment shifts, greed lags behind reality. Even after the release of outstanding financial results from individual companies, the crowd slowly returns to risk acceptance, giving the negative backdrop extra time to dictate market conditions. Psychologists explain this as the "loss aversion effect"—people feel pain from losses more intensely than pleasure from profits.
Cognitive Biases and Selective Perception
Traders and investors tend to exhibit "confirmation bias"—focusing only on information that confirms their fears or downward expectations, while actively ignoring positive signals. Following a sharp decline, many firmly believe that "it was meant to happen," even though positive corporate news could have justified growth at the time they entered their positions. This effect is amplified on social media, where algorithms show content that aligns with the user's current mood.
The Information Background: News, Social Media, and Media Influence
Dominance of Negative Headlines
Media outlets and social platforms often propagate "sensational" negative headlines that trigger immediate spikes in fear and clicks. Positive corporate reports are published in specialized sections, but remain buried at the bottom of news feeds or lost among panic-driven headlines about macroeconomic threats. Studies on media consumption show that negative news receives seven times more shares and discussions than positive news.
An example is the situation with Apple’s Q3 2022 earnings report: despite exceeding revenue forecasts and launching new products, the company’s stock continued to decline due to widespread recession fears and tightening monetary policy from the Fed.
Algorithmic Trading and News Filters
High-frequency algorithms react to keywords in news headlines faster than humans, automatically triggering sell-offs upon encountering negative terms such as "recession," "inflation," or "war." Positive surprises in corporate earnings often fall under the "ignore in a generally negative sentiment" filter, which slows or stops the rise of specific stocks. Large funds' algorithms are programmed to protect capital rather than seek opportunities in uncertain environments.
The Influence of Social Media and Forums
Group discussions on Reddit, Telegram, and specialized forums create echo chambers, where similar opinions amplify one another. When the outflow of negative messages and memes surpasses the volume of positive content, bearish sentiment begins to dominate fundamental analysis. The phenomenon of "meme stocks" has shown how social media can influence prices, but the same mechanism works in reverse during widespread negativity.
Market Sentiment Indicators and Intermarket Correlation
VIX and the Fear Index: Barometers of Panic
A rise in the VIX volatility index above 30 signals that investors expect significant price fluctuations and are prone to defensive actions. During periods when the VIX exceeds 40-50, any positive corporate reports are received by the market skeptically and often only partially factored in. The CNN Fear and Greed Index, aggregating several sentiment indicators, serves as a powerful filter for assessing whether good news will have an impact.
Asset Correlation and the Scale Effect
During calm periods, correlation between stocks from different sectors ranges from 0.3 to 0.5, but during a general negative sentiment, it sharply increases to 0.8 to 0.9. This means that a decline in the banking sector automatically drags down technology and consumer stocks, even if the latter have valid reasons for growth. Investors apply the "sell everything" principle to minimize risks, regardless of sector specifics.
A striking example is the 2008 crisis, when shares of McDonald's and Coca-Cola, which showed stable performance, lost 30-40% of their value simply due to a broad collapse of the financial system. Consumers continued to buy hamburgers and soda, but investors exited all risk positions en masse.
Put/Call Ratio and Sentiments in the Options Market
A high Put/Call ratio (above 1.2-1.3) indicates a predominance of bearish bets among options traders. In such periods, the recovery dynamics of individual stocks are quickly suppressed by new waves of hedging and protective put purchases. The options market often serves as an indicator of the sentiments of large institutional players, who set the tone for the entire market.
Mechanisms of Panic Sell-offs and Institutional Behavior
Causes of Systemic Sell-offs
Major institutional sell-offs arise due to margin requirements, portfolio rebalancing, and liquidity demands from regulators. When hedge funds receive margin calls, they are compelled to sell their best assets to cover losses on weaker positions. This process overlooks fundamental differences among companies—all liquid positions are sold en masse. Pension and insurance funds are also compelled to reduce equity exposure when certain volatility levels are reached.
Technical Factors and Automatic Stop Losses
Modern asset managers use algorithmic stop losses that trigger upon breaching technical levels, regardless of the news backdrop. When many of these orders activate simultaneously, it creates a snowball effect. Even excellent corporate results cannot halt technical selling initiated by algorithms.
Liquidity and Spreads: Signals of Impending Chaos
A rapid expansion of bid-ask spreads, sharp spikes in volumes during downward bars, and abnormal deviations in indicators like OBV (On-Balance Volume) signal an intensification of panic sentiment. When spreads for blue chips increase three to five times, it indicates that market makers are anticipating chaos and incorporating higher risks into their quotes.
High-Frequency Trading as a Crisis Amplifier
Speedy Algorithm Reactions
HFT robots analyze news feeds and react to key terms in milliseconds, significantly outpacing human responses. They exacerbate the initial downward impulse, creating a snowball effect. Positive corporate news often fails to materialize as algorithms continue to follow the "overall risk-off" narrative.
Stop Hunting and Liquidity Traps
Market participants use algorithms to deliberately "hunt" for retail traders' stop losses in key support and resistance zones. This allows them to accumulate positions at better prices but temporarily intensifies sell-offs and creates a false impression of fundamental deterioration in companies.
Survival Strategies in a Negative Environment
Counter-Trend Trading and Reversal Search
During periods of mass panic, experienced traders look for false breakouts of critical technical levels and enter positions when indicators show "oversold" conditions (RSI below 25-30, stochastic in the oversold zone). The key principle is to use the crowd's fear as a signal to buy quality assets at reduced prices. However, such strategies require iron discipline and the readiness to hold positions amid ongoing negativity.
Hedging the Portfolio with Defensive Assets
Utilizing options (buying puts), investing in gold ETFs, U.S. government bonds, and currency hedging helps protect the portfolio from a negative overall background. Professional managers recommend maintaining 10-15% of the portfolio in defensive assets at all times, increasing the share to 25-30% when panic indicators rise.
Selective Approach to Fundamentally Strong Assets
Focusing on companies with low debt, stable cash flows, transparent management, and strong competitive positions allows one to weather periods of overall negativity better than the market and recover faster when sentiment improves. Such companies often become targets for "smart money" purchases during sell-offs.
Historical Cases: Lessons from the Past
The Tech Bubble of 2000-2001
Even profitable tech companies with real revenue lost 70-90% of their market capitalization due to a mass exodus from anything tech-related. Cisco Systems, the leader in networking equipment with growing sales, plummeted from $80 to $11 per share. Microsoft lost over 60% of its value, despite its dominance in operating systems and office software.
The 2008 Crisis: When Logic Gave Way to Panic
The 2008 financial crisis demonstrated how the fear of bank bankruptcies spread to all sectors of the economy. Even consumer sector companies with solid business models lost 40-60% of their market capitalization. Johnson & Johnson, a manufacturer of medical goods with a dividend history of over 25 years, dropped 35% despite stable demand for medicines and medical services.
The Pandemic Shock of March 2020
Lockdowns and uncertainty regarding the duration of the pandemic triggered the fastest bear market in history. Even quarantine beneficiaries initially suffered from mass sell-offs. Netflix, which saw its audience grow at record rates, lost 25% of its value in two weeks. Only intervention from central banks with unprecedented stimulus was able to shift sentiment.
Conclusion: Understanding Mechanisms as the Key to Success
Crowd psychology remains a dominant force in financial markets, capable of overshadowing even the most compelling fundamental factors. In a negative overall backdrop, positive news for individual assets frequently loses vigor due to fear, mass sell-offs, high asset correlation, and algorithmic sales. Understanding these behavioral mechanisms, utilizing sentiment indicators, performing correlation analysis, and implementing protective strategies allow one to avoid becoming a prisoner of crowd emotions and to find opportunities where others see only threats.
Successful investors study not only financial reports of companies but also the psychological patterns of the market, remembering Warren Buffett's saying: "Be fearful when others are greedy and greedy when others are fearful." Often, in moments of extreme crowd fear, the best long-term opportunities arise for those capable of acting against the prevailing sentiment.
