Unwinding Leverage
“There’s no question that the ride has been a wild one recently,” said Matt Maley, chief market strategist at Miller Tabak + Co. “Today’s bounce was an impressive one and we did see some signs of capitulation at the mid-day lows. The volume was strong, the breadth was very negative and we did see signs of ‘forced selling’ like margin calls. This should allow the bounce to last for more than just a few hours.”
“That said, the amount of leverage that build up over the past several years will take longer to unwind,” he added. “Therefore, I think we’ve moved into a period where investors should sell the rallies rather than buy the dips.”
Head Fake
“The S&P 500 intraday relief rally on Monday was a head fake. The index completed an almost perfect intraday inverted head-and-shoulders to end the day about flat,” said strategist Barry Bannister of Stifel.
Bannister says a number of things need to take place for a stock market low to occur and the bull market to resume—“but none appear to be in the offing.” They include a dovish Fed pivot that lowers the 10-year TIPS real (after-inflation) yield, a bottoming in the U.S. Manufacturing PMI and a bottoming in S&P 500 quarterly EPS beats minus misses, which has faded since the third quarter.
Missing Skew
“S&P skew (and skew buying power in general) remains weak and low even as we were selling off hard,” said Amy Wu Silverman, equity-derivatives strategist at RBC Capital Markets. “Part of the reasoning—and this part feels a bit worrisome—is that folks are just not as long and simply don’t have much to hedge. Instead, investors are not demanding downside protection because they are taking money off the table instead. Interestingly, even as we rallied back this afternoon, S&P normalized skew levels remain close to one-year lows across all tenors.”
Pullback Overdone
“Market worries around rates and corporate margins are overdone,” said JPMorgan Chase & Co. strategists led by Marko Kolanovic, in a note Monday. “The recent pullback in risk assets appears overdone, and a combination of technical indicators approaching oversold territory and sentiment turning bearish suggest we could be in the final stages of this correction. While the market struggles to digest the rotation forced on it by rising rates, we expect the earnings season to reassure, and in a worst case scenario could see a return of the ‘Fed put.’”
—With assistance from Cormac Mullen.
This article was provided by Bloomberg News.