Eoin Treacy's view

Everyone was conditioned to expect crashes. The one thing everyone in the financial community, who has been around for more than a decade at least, has vowed is not to be caught on the wrong side of a crash again. That contributed to a lot of trading in and out of position in the aftermath of the credit crisis. That’s the first psychological perception stage of the market: disbelief.

More recently the argument that it is impossible to beat the market and that the only way to participate is with ETFs has been gaining ground. That coincides with the evolving psychological condition to accept the bullish hypothesis and to just stay long, in other words buy and hold. That’s the second psychological perception stage of the market: acceptance.

Then the market accelerated into the January peaks as people extrapolated the trend and felt they needed to buy in order to avoid losing out later. That has contributed to the corrective phase the market is now in because so much good news was priced in there wasn’t much left over. That’s the third psychological perception stage: euphoria.

This will form a major part of the conversation at The Chart Seminar in Melbourne on Monday and Tuesday next week.

So what next?

Wall Street is at least in a medium-term corrective phase that could last for anything from 6 to 18 months. The massive reaction against the prevailing trend posted in February had type-2 trend ending characteristics. Generally speaking it is normal to a see a period of volatile ranging after such an event. So far, the region of the trend mean continues to offer support. If the evolving range is limited on the downside by the trend mean that can be considered the best possible scenario and, so far, the primary indices are bouncing which is encouraging.

The big question I think many people will be wondering is whether this evolving range is a pause in the medium-term bull market or part of a softening up process ahead of deeper declines in conjunction with the next recession.

There is no doubt that the medium-term bull market is in a mature stage. However, the lead indicators for a recession are not flashing red. The stock market is a discounting mechanism so it is not at all unusual that a loss of momentum evolves before a recession. That does not mean we have to conclude that a crash is inevitable but there are definitely unresolved questions about the short-term nature of fiscal stimulus against a background of already full employment high capacity utilitisation, which could exacerbate emerging inflationary pressures and therefore a more robust central bank response.  These are medium-term considerations however. The immediate focus of attention remains on how well major indices hold their recent lows. That will inform us on whether these medium-term considerations are becoming more urgent.