Speculative Herding, Bubble and the Trading Strategies: Behavioral Finance

While browsing the Internet, an article appears with the title "Speculative Herding, Bubble and the Trading Strategies: What can we learn from Behavioral Finance?" It seems interesting and may contain useful information on trading strategy. There are two parts on the topic. The links are as following.
Speculative Herding, Bubble and the Trading Strategies: What can we learn from Behavioral Finance? Part I
Speculative Herding, Bubble and the Trading Strategies: What can we learn from Behavioral Finance? Part II

There are some interesting points mentioned in the article.

"The heterogeneity of these speculative trading provides the liquidity to the market. In a normal-functioned market, speculative trading fosters price discovery and ensures market efficiency.
However, when one-sided opinions drown out the opposite opinions and the heterogeneity beliefs arise from the overconfidence agents, it induces a herding behavior and the market ceases functioning rationally."

"Investing is a social activity. Herding occurs when the market participants seek signals from others in matters of knowledge and behavior and therefore align their convictions with the leading voices within the group."

“(Herding is) dependence upon the behavior of others most easily substitutes for rigorous reasoning when knowledge is lacking or logic irrelevant. In a realm such as investing, where so few are knowledgeable, or in a realm such as fads and fashion, where logic is inappropriate and the whole point is to impress other people, the tendency toward dependence is pervasive. Trends in such activities are steered not by the rational decisions of individual minds but by the peculiar collective sensibilities of the herd. … To forecast on the basis of the current sentiments of the herd is to “forecast” the present mood, not future events. Success is simply a matter of whether the present mood maintains, which it usually does not.”

"Sentiment indicators, net order flow and autocorrelation in daily trading volume can be easily integrated into daily decision making process. For more sophisticated traders, many models, such as game theory, complexity theory and other social sciences, are available to construct a tradable strategy and mitigate risk."

"The stock market and various asset classes rebounded after the financial meltdown. It is arguable whether or not we are in a liquidity-fueled mini bubble. There are certainly distinct fads in the recent post-crisis market. Many market participants flock into certain areas like Gold, certain commodities and the emerging markets."

In another article from a different author, “Where are We in the Bubble Process”, the author predicts a sustained and difficult road ahead.
"In my opinion, I think the panic phase of the credit bubble is past us. Unfortunately, what is consistent in each of the major bubbles in the history of the world is that they always suffer extended periods of sideways to down action (though generally not dramatically down)."

Contrary to the author's opinion, it is believed that current equity stock market is at the "Return to the mean" stage in the pricing model. There have been different bubbles in the past, Nikkei, Gold, Great Depression, Nasdaq, etc. Current housing bubble results in a credit crunch that leads to economic recession. The equity stock market is priced at a valuation that can be decomposed into its fundamental component, and, the speculative component from the demands by the investors who overreact to news or are vulnerable to fads. Since economic indicators does not indicate a fast recovery, the majority of investors stay away from equity stock and park the funds into treasuries and bonds which may become a bubble.

However, the wealth generated by technology and global liquidity will fuel the asset class targeted by the herd, which is currently treasuries and bonds. In a world of human complexity, short term speculative trading strategy is to predict market movement as we enter into an anemic economic growth period and assets are increasingly prone to speculative attacks. Investors need to keep constant vigilant to the underlying fundamentals and market ecosystem.