"Thanks for the terrific commentary. Recently, David said that investors do in the current cycle what they wish they had done in the past cycle. This has been oft-repeated in Fullermoney, but would you elaborate as I realize I don't fully grasp it?

"If, currently, the past cycle is the 2008-09 bear phase, then was the past cycle for the 2008 decline the 2000-02 50% decline, in which case investors were correct to sell? Or does it apply to reactions/corrections along the way to the peak where investors take fright and sell. In which case, how does one tell whether it is a correction or the start of something bigger?

"I would be interested in your thoughts about the Chinese government's supposed ability to dampen market moves. I remember there was media talk in 2007-08 that the Chinese government would not let the market collapse due to the Beijing Olympics, but the Shanghai Composite went from 6000 to 2000 anyway."

David Fuller's view Thanks for the thoughtful feedback.

I think you do grasp my point but let me run through it again. Most animals, including humans, are hardwired to respond when our antennae pick up previous warning signals of dramatic events. Otherwise we would never have survived as a species. However, there are more routine events than dramatic ones, even in markets.

The bursting bubble in 2000 and subsequent weakness in 2001 was obviously a very big event, etched on people's brains. Following a lengthy convalescence (base building stage) stock markets commenced a vigorous recovery in 2Q 2003. It looks quiet consistent on this 20-year monthly chart of the DJ World Stock Index but there were several reactions and three larger pullbacks which I would define as corrections on the way to the 2007 peak. These can be seen more easily on this weekly 10-year chart. In recalling that bull trend, you may remember that sentiment deteriorated quickly during each pullback and many investors chose to jump out, not least during the 2004 correction, because the recollection of 2000 and the long bear trend was still so vivid.

Inevitably, there are far more reactions and corrections to interrupt uptrends, albeit only temporarily, than actual bear markets. However every significant uptrend is eventually followed by a bear market because people overdo it and circumstances change.

Having seen a bigger correction recently, which has now given way to the first decent rally since the April high, the question we need to ask is: Do we see any top formation characteristics similar to either 2000 or 2007-2008? Unfortunately, the answer based on charts for the DJ World Stock Index shown above is yes, mainly due to the bigger, sharper correction seen which also broke the rising 200-day MA. This is a Type-2 (extreme reaction against the prevailing uptrend) characteristic as taught at The Chart Seminar. Many other indices, although not all as you will have noted from the recent chart reviews, have seen broadly similar deteriorations.

However not even this guarantees that another bear market must soon follow, as some fear, although this has become one of the possibilities. For this reason, I would pay close attention to the low near 200 on the charts above, or even more importantly 1040 for the S&P 500 Index, as I have emphasised recently, including yesterday. If these levels fail to hold the door to another and potentially significant sell-off opens. Conversely, a strong rally and higher low on the next reaction would reduce this risk.

I have mentioned recently that the vivid memory of 2008 may have exacerbated the correction from April's highs. That comment may have prompted the email immediately above. However there are plenty of more tangible reasons for the sharper correction, not least the triple or even quadruple waterfall of events which I have frequently mentioned.

Among the key reasons why I am hoping that the recent correction is no more than a temporary aberration leading to a longer ranging phase before uptrends resume, is that interest rates remain low and the US Yield Curve is nowhere near the dangerous zero level. However (unfortunately, in this business nothing is certain), this would not help if the USA slid into a Japan-style deflationary slough.

Meanwhile, I raised some cash recently by selling a gold share which had received a takeover bid (Lihir) and I am not averse to investing this cash at the right prices. Meanwhile, I invested a separate and smaller amount of cash yesterday, in two favourite Fullermoney themes (ABD and FXC). Overall, I prefer to be a buyer following setbacks and a seller following rallies. (See also yesterday's stock market comments.)

Lastly, in answer to the China question above, their small incremental monetary policy changes have had some success in changing fundamental concerns such as an overheating property market, without derailing the growth juggernaut. Regarding the Beijing Olympics, some of us hoped that China would want a showcase stock market in addition to a showcase games. This was a misunderstanding of their priorities.