It was a scene straight out of the 1983 superhero classic Superman 3 – with a twist.

In the movie, a computer whiz (played by legendary comedian Richard Pryor) working at a bank found a bug in the computer system. This bug skimmed half a cent off of millions of bank transactions. That pool of money was floating in the system – just waiting for someone to take it.

Pryor’s character tapped into the system and deposited all those half cents into his account. And when his next paycheck came along, he walked away US$85,789.90 richer.

(Factoring in inflation, that’s equivalent to US$261,437.43 today.)

But then he made a rookie mistake. Flush with cash, Pryor’s character bought a bright red Ferrari the next day, and drove it to work. He was immediately caught.

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Richard Pryor revisited

In November 2016, the software chief of Huaxia Bank (Exchange: Shanghai; ticker: 600015), a mid-sized Beijing-based bank with a market cap of US$17 billion, found a flaw in the bank’s software system.

The bank didn’t record internal withdrawals made around midnight – so there was no record of transfers made then.

By inserting a few lines of code in the bank’s systems, he was able to take money from other accounts (nearly US$1 million in total) and transfer it to a dummy account.

He then withdrew it from ATMs, in small increments, over a year.

The irregular activity in the dummy account was eventually detected and reported to the authorities.

Instead of buying a Ferrari, Huaxia’s software chief kept the money in his account at the bank. After he was caught, he told police that he had also invested some of it in the stock market.

Different contexts, different outcomes

Filmed in August 1982, Superman 3 reflected what was going on at the time.

Thanks to Apple (Exchange: New York; ticker: AAPL) and Commodore, the personal computer revolution had begun. That paved the way for Superman’s nemesis – an artificial-intelligence-enabled supercomputer. It could find any enemy’s weakness.

Also around that time, the U.S. economy had come off back-to-back economic recessions. Between November 1980 and August 1982, the S&P500 Index lost 26 percent. Few people were in the mood to invest.

So instead of investing the US$85,789.90 in the stock market, which would have seemed suicidal and unrealistic at the time, Richard Pryor’s character bought a Ferrari.

By contrast, the Chinese software chief invested his stolen money in the stock market. He did so at a time when the Shanghai Composite Index was in the midst of an uptrend. It had risen 7.5 percent.

Here’s the catch…

Exactly one year after Superman 3 started filming, the S&P 500 Index had risen 56 percent.

By contrast, the Shanghai Composite Index was down 26 percent in 2018 – the year after the Chinese bank’s software chief was caught.

It’s not a perfect example… but this shows the best time to buy stocks just might be when the media or latest movie screen blockbuster isn’t talking about stocks – and vice versa.

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When to be fearful or greedy

Warren Buffett, Chairman of Berkshire Hathaway, famously said, “Be fearful when others are greedy and greedy when others are fearful.”

But how can you tell when the market is fearful or greedy?

We’ve written in the past about the VIX index, also known as the “fear index”, which is a measure of anticipated market volatility.

It’s based on option prices of individual stocks in the U.S. S&P 500 Index. When investors expect more price fluctuation (that is, for prices to bounce around more), the VIX goes up. And volatility is greatest when markets fall. That’s because investors are fearful and they take measures to protect their investments.

But as we’ve seen, the VIX can stay low for a very long time. And while it has had several notable spikes in the past year – due to the U.S. trade war with China, and rising interest rates – the VIX has fallen again.

It’s also a lagging indicator. That means for the VIX to move up sharply, a significant drop in the market has likely already materialised.

Another way to tell if the market is being fearful or greedy is to look at valuations. One commonly used valuation to gauge markets is the cyclically-adjusted price-to-earnings (CAPE) ratio.

The CAPE ratio is a longer-term, inflation-adjusted measure that smoothens out short-term earnings and cycle volatilities to give a more comprehensive, and accurate, measure of market value.

We’ve been warning for a while now that the U.S. markets have been trading at historically high CAPE ratios. That’s come down a bit after the 20 percent decline during the closing four months of 2018.

But at 29.9 times, the U.S. market’s CAPE ratio is still twice that of emerging markets (14.5 times). Emerging markets are cheap and unloved, while the U.S. markets are still expensive.

Yet another way is to observe what people are talking about or not talking about (or talking about in a bad way). This shows up in what we see in the entertainment media (i.e., movies) or hear about in the news.

Few people were talking about the stock market in 1982. In hindsight, it was the best time to buy stocks.

Five years later, the movie Wall Street came out. It was about a young and impatient stockbroker willing to do anything to get to the top, including trading on illegal inside information. At its core, it was all about greed.

Between August and November of 1987, the S&P 500 plunged 33 percent.

Then following the 2008-2009 financial crisis, at least half-a-dozen movies came out of Hollywood bashing Wall Street. They made hundreds of millions of dollars in the box office – and scared ordinary people.

The S&P 500 Index has since quadrupled (even considering the recent correction).

This isn’t to say that Hollywood and the media is an unwitting predictor of what will happen to the stock market. But observing what comes from Hollywood teaches us what the public is seeing and hearing. It tells us where the public’s minds could be at. Fear or greed.

While there have been no Hollywood movies made yet about investing in China’s stock markets, there’s no shortage of negative news about it.

As the worst-performing stock market in 2018 (having fallen 25 percent), it’s often been painted as a place only the brave dare tread.

But the situation could be very different a year from now.

Good investing,

Brian Tycangco
Editor, Stansberry Pacific Research