Phisix: Market Indicators Suggests for Further Corrections

``Markets are cyclical – always and forever. As share prices oscillate between lofty valuations and lowly ones, investor perceptions oscillate between greed and fear. When investors are fearful, they demand a large margin of safety from the assets they buy. But when they are fearless, they worry less about safety than an intoxicated teenager.-Eric Fry, Whack-A-Risk Rude Awakening

Figure 1: Corrective Phases of the Phisix

Judging from past experience of if one would use past data to extrapolate on the future, the shortest corrective phase of the Phisix since 2002, was in 3 months, i.e. October 2004 to January 2005, as shown in Figure 1.

The end of the corrective cycle is determined by its breakout from its previous high. The numbers indicated in the chart shows of the months it took for the Phisix to eventually supersede its previous highs.

As you would notice, one of the core pillars of my analysis has been anchored on the understanding of market cycles, where market cycles are principally determined by psychology as previously defined. And the present market cycle implies that the corrective phase is a natural phenomenon.

Since the start of the cyclical reversal in 2003, declines as measured by peak to troughs had an average period of about 2 months, where if applied to the current settings (topped at February 21) would possibly translate to a trough sometime latter April. (That’s IF the cycle plays out as in the past! But what if HOPE or the bulls are right?) The rest of the months which follows the trough represents as the healing phase or a period of consolidation segueing into gradual ascendance.

There is also the seasonality factor. You’ve probably heard of the axiom “Sell in May and Go Away”. While this may not always hold true, it simply implies that the seasonal periods of May [50:50 for May-June in a span of 22 years] heading towards the third quarter COULD be the weakest link for stock performance.

In other words, based on cyclical and seasonal factors alone, the odds for a short-term massive comeback looks obscure, or your two birds in the bush in exchange for the present one comes with significant obstacles.

Yet this does not even consider the degree of the upside gains relative to its possible percentages retracement.

If one were to use the Fibonacci figures, based last July’s trough until the peak of February 21 as possible indicators, the levels of retracement are at 2,890 (38.2%), 2,750 (50%) and 2,550 (61.8%). Pardon me for practicing financial astrology [in accordance to Benoit Mandelbroit’s thoughts on chart reading] here. So far the Phisix has yet to reach any of these natural retracement or fallback levels which may suggests of further room for retracements.

Question is, with the current developments and at present levels is it worth the risk to underwrite?