Why the stock market may fall further

Financial markets rarely announce turning points when they occur.

Investors usually recognize them only in hindsight, after prices have already moved and explanations begin to appear obvious.

This recurring pattern explains why markets cannot be understood through earnings forecasts or economic projections alone.

Investor behavior is influenced as much by collective confidence as by fundamentals. When social mood is optimistic, uncertainty is discounted and risks appear manageable. When sentiment weakens, however, even stable conditions begin to look fragile, and market expectations begin to adjust long before economic indicators reflect the change.

This relationship between sentiment and market behavior was the topic discussed in this column last June 2025 entitled “Why the stock market could keep falling” at a time when the Philippine Stock Exchange Index (PSEi) was trading near 6,300.

Drawing from Robert Prechter’s socionomic theory and Elliott Wave analysis, this column suggested that the market might be undergoing Wave C of a larger corrective cycle.

Within Elliott Wave structure, Wave C represents the stage when optimism fades materially and investors begin to question whether recovery will occur anytime soon. Historically, this phase has coincided with periods of political instability, financial stress and in some cases, armed conflict, as declining social mood manifests beyond financial markets.

At the time, this column raised the possibility that a Wave C correction could push the market lower. In the months that followed, the PSEi gradually weakened and eventually broke below the psychologically important 6,000 level, with the index reaching the 5,600 region late in 2025.

That selloff was characterized by the weakest level of investor confidence since the postpandemic recovery. Trading volumes declined while rallies struggled to sustain gains, which are conditions often observed during Wave C corrections.

The weakness, however, did not persist indefinitely. Selling pressure gradually eased toward the end of 2025, and the market stabilized before moving higher. The PSEi subsequently recovered in early 2026 and returned toward the 6,500 range where it trades today.

For a time, this rebound suggested that the correction might have completed its course.

Subsequent developments, however, require a cautious reassessment. The escalation of war in the Middle East has renewed global risk concerns, while domestic issues—such as the political tensions surrounding the impeachment efforts and recent corruption allegations—have added to market uncertainty. Such conditions suggest that social mood remains fragile rather than fully recovered.

Historically, such developments tend to occur during periods of rising negative social mood rather than cause the deterioration in sentiment themselves. This observation supports Robert Prechter’s argument that major conflicts often coincide with the later stages of corrective phases in financial markets.

When viewed together, current global and domestic conditions suggest that the social mood described in the June 2025 article has persisted and may have, in fact, intensified.

These developments bring renewed attention to the present position of the PSEi. The recovery from the 5,600 low remains constructive, yet the index now trades near an important technical threshold.

The 6,000 level has emerged as both a psychological and structural support zone. If the PSEi were to decisively fall below 6,000 again in the coming weeks, the implication would be that Wave C has not yet completed but is extending.

Under such a scenario, downside risk toward the previous 5,600 low and lower support zones near 4,600 would reemerge as realistic possibilities.

Importantly, this development remains consistent with the earlier Wave C framework. The June 2025 discussion observed that Wave C corrections have historically coincided with periods of heightened fear and social tension, and in some cases, with the outbreak of war.

The expansion of active conflict today reflects conditions often associated with late-stage corrective environments in financial markets. Markets do not weaken simply because war begins; rather, both tend to reflect the same decline in social mood.

In this context, how the market behaves around the 6,000 level becomes critical. Sustained weakness below this threshold would indicate that the Wave C correction remains incomplete and that confidence has yet to stabilize.

While downside levels such as 5,600 and 4,600 are not guaranteed outcomes, they represent areas markets have historically revisited when negative social mood continues to persist.

At present, investor psychology remains cautious and uncertain. Many stocks now trade at levels that already reflect considerable pessimism, yet markets rarely bottom on price alone but when pessimism reaches exhaustion.

The persistence of global conflict and domestic political uncertainty suggests that such emotional resolution may not yet have fully occurred.

Market cycles rarely resolve in a predictable manner. Corrections often extend just as investors begin to believe the worst has passed. For now, the market suggests that while the long correction may be nearing completion, the possibility that Wave C is still unfolding cannot yet be dismissed.

Henry Ong is a registered financial planner of RFP Philippines. To learn more about investment planning, attend 115th batch of RFP Program this March. To register, e-mail at info@rfp.ph.