After Wednesday’s equity market rout, Thursday was a day of mixed fortunes. Despite the sell off in US equities there had been one or two encouraging signs overnight on Wednesday from across the pond for traders in Europe to wake up to, this helped equities initially start Thursday on a firmer footing. The firmer footing did not last long, but there was a recovery again towards the end of the day.
The encouraging signs that gave heart early on was the surge in traded volume, this is often seen a sign of trader capitulation. The Semiconductor indexes, high yield credit and the Russell 2000 index of small cap stocks all finished higher by the end of Wednesday evening, all considered leading indicators for the larger cap indices. The Vix had traded at close to 30 at one stage on Wednesday as the Dow fell 400 points, by the close the Vix had fallen back towards the mid 20’s; encouragingly it fell again on Thursday. 10 year US treasury yields that had fallen at one stage to 1.9%, closed on Thursday at 2.16%, another encouraging sign. The recent rise in the US dollar, again considered a negative for equity sentiment, has given back some of those gains.
A lot has been made of the length of time between 10% corrections in the US equity market, but that does not mean the rise since 2009 has been all roses. Indeed in 2011 we saw a correction of nearly 20%. There have been 14 instances of the S&P 500 correcting more than 5% since 2009; there have been three this year.
Each correction brings back memories of 2009, and fears that we will face a repeat. Concerns debt levels are higher than in 2009, and rates just about as low as they can go, the fear is that the governments are running out of bullets. The dampening down of QE expectations in Europe is an example of this, leading to the recent sharp reversal in Greek bond yields
At this moment in time the global economy is expected to grow around 3%, this year and next. Banks balance sheets are generally in better shape, admittedly as a lot of the debt has been pushed onto governments. The corrections when they happen by nature a swift and the catalysts similar, is the global economic recovery strong enough? What is the impact of tighter monetary policies? The earnings season will influence investor sentiment into the year end, but in the mean time traders will want to see the encouraging signs form the last couple of days continue, before they commit to the year-end rally.