Market Bounce coming?

Markets rallied a little further across Europe and the US on Friday evening which gives me further hope that the bounce that I wrote about might be coming on Friday is on its way. At the close of play the FTSE, DAX and CAC were up between 3 and 4% while the Dow and S&P closed up around 1%. the AUD didn’t really get much of a draft from this upward price action settling at 1.0350 and opening this morning at 1.0360.

While I don’t thing the economy is going to support the longer run bounce in equities I’m guessing that after a big selloff, indeed crash, like we just went through the market structure is supportive of a consolidation at least and more likely a bounce.

On Friday I wrote that this type of market volatility is not normal and that

“structurally markets are very oversold. In general we would be looking for a bounce, or a period of stability in prices to wash away this oversold position – from a purely technical perspective that would be the way that I am betting (not advice though folks this is just my view).” 

As dangerous as it is to make market predictions at times like these I still think that would be my near term base case.

The reason for this is that what we have here is, in my opinion, the reverse of Minsky’s argument, proved right – once again – by the GFC that “stability leads to instability”. I remember a time, when as a fund manager, FX vols got down to what were extremely low levels historically as the market had been and was factoring in stability. Pretty much as soon as FX dealers were ringing me, and others, telling me that vols were really low the AUD/USD  started to move and vols shot up. It was similar with phone calls when it ducked under 0.6400 in the second half of 1998 the cries of “the AUD has only spend 2% of its trading life below 0.6400” – we know how that went!

Empirically we know that volatility clusters in a fashion akin to what we have seen over the past few weeks and then certainly the first part of last week – but equally we know that it washes away.

Friday night’s relatively quiet trade was, I hope, the start of a quieter period in markets. But, if you are wondering why quite markets give way to volatile ones and extreme volatility can give way to a quieter period it’s really just about the approach of traders to their positions. It is really very straight forward and very well explained in a blog I read over the weekend from Market Anthropology .

Like me the author suggests this hope we share of some stability, even a bounce, could be an apparition but explains our shared rationale for a bounce after such an extreme selloff and then volatile period in the following manner,

I consider the market’s wide and structured range over the past week as understandable. It comes as no surprise to me considering the angle and velocity that the market came in at – it was for all intents and purposes a crash. While unnerving to experience a days gains evaporate the very next morning, the market’s considerable energy from the move is simply maintaining its inertia within the tape without extending itself – or rolling over. Unlike a true dead cat bounce where the market strings several days of gains together in a sharp reflective trajectory, the market is working off the energy in place, which will likely lead to decreasing volatility, a diminishing intraday range and a bottoming process towards scaling the wall it just fell off of. I’m not saying we won’t revisit these lows one month out (very likely), but, it supports the idea of moving forward in a constructive fashion – instead of grinding on a glide-path lower, or worse. 

Certainly the Consumer confidence numbers in the US were abysmal on Friday night and there is no concrete reason to be bullish, but after moves like the last week and month markets need a pause to refresh themselves – just a respite from the falls would be good for every one.

 greg@lighthousesecurities.com.au

www.twitter.com/gregorymckenna

This blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.

If you do need economic, investment or financial advice we are happy to help.

Please Email the team at Lighthouse at info@lighthousesecurities.com.au or Greg directly on greg@lighthousesecurities.com.au

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