Fear and Greed!

Now's both a very scary and exciting time to be watching the global economy. I often find myself trying to measure sentiment - be it at a national level, corporate level or individual (people watching?). In a relatively short period of time, the mood can change noticeably. Does it follow any pattern?

The wave pattern below (hat tip to John Nofsinger) is one of my favourite charts and I mentally refer to it on a regular basis when observing situations. It's based on the Kübler-Ross grieving cycle and shows how sentiment can affect investment cycles, particularly bubbles.
You can apply this to many situations and markets. At present we are spoilt for choice as many situations are currently sliding down the euphoria-fear-despondency stage of the cycle. However, economies and markets need not be at the same point in the cycle as each other, since some things lead/lag others.

The best current example for tracking sentiment is the housing market. The UK peaked in mid-2007 when it was popular to view property as a one-way bet to millions. Since then we have started to slide down the chart. My guess is that we are (in Jan 09) in the process of moving from fear to desperation and are moving along a step every 5 months or so.
In the US, they are about 12 months ahead of us on the down curve. I'd guess that they are now at the capitulation stage and the market could bottom in the next year.

It goes without saying that everyone has their own opinion on where things are in the cycle! Still it's an interesting approach to watching the world evolve...

Edit (22/01): Just seen a forum discussion asking where we are in the housing cycle. The consensus view seemed to be between denial and fear at present and moving slower than I thought. So there you go!