I trust all’s well in your neck of the woods.

Should we be worried about the stock market? The technical evidence doesn’t appear to match behavioural economist Mr Thaler’s views of the stock market.

 

Eoin Treacy's view

Thank you for your well wishes and despite news of wildfires the sky is still sunny. Thanks also for this article which is representative of the widely held view a significant market correction is imminent. 

At The Chart Seminar we talk about the fact that there are three things you can see on a chart. The first is that we see what we want to see. Each of us has a natural proclivity to have a positive bias towards confirming evidence and a negative bias towards nonconforming evidence. Humanity’s almost unbounded capacity for self-deception is behind refusing to recognise topping or bottoming activity because we do not want to engage in the psychological rigour of challenging what has until now been a winning strategy. 

The second is that we see what we think we are going to see. Anyone who has ever held a position knows there is almost as much stress attached to holding a winning position as there is to holding a losing one. Of course, it’s a different kind of stress. We simply do not know when the market will stop rising and holding on for what we suppose will be a consolidation in an orderly trend is necessarily challenging to our bullish conviction. We naturally drift towards the views of those who confirm our bias while we feel uncertain or ambivalent about non-conforming views. 

The third is that we can see what is in fact there. Obviously, this is the most favourable outcome but to ensure we are achieving an objective perception of reality we need to have an appreciation of the chart facts/consistency characteristics and what topping/bottoming activity looks like. 

In last night’s video, I showed this page from the Wall Street Journal which has links to three stories on impending doom. 

Thanks to a subscriber for this edition of R. Hardings’ report from Maybank which contains a number of additional harbingers of doom; not least the preponderance of Hindenburg omens, declining breadth, declining share buybacks, low retail cash levels and high margin debt. 

When people are so vocally expressing anxiety it generally means they are worried and not buying but the stock market continues to advance in what remains a consistent manner. A short-term overbought condition is evident so there is potential for another, multi-week, pause to unfold. We can’t simply ignore so many bearish prognostications but the fact that it is such a widely held view suggests a contrarian perspective is more likely to prove correct. 

A bearish catalyst will likely be required to realise the most negative views highlighted in the media. That could be the failure of the Trump administration’s tax initiatives, a potential war or the bond market taking fright at the prospect of the Fed reducing the size of its balance sheet. Of these three, the bond question is happening this month and may be the reason so many people are expressing anxiety. So far, the bond market is taking the news in its stride.