CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Please ensure you fully understand the risks involved. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Please ensure you fully understand the risks involved.

Crisis on the horizon ‘unlikely’

Harry Colvin, of Longview Economics, says the correction still has a further leg lower, but macroeconomic fundamentals suggest this does not herald a bear market.

IG Analyst

Publication date : 2018-02-14T16:31:25+0000

Video poster image

Unstoppable bull run stalls

It felt like an unstoppable bull run for equities, with the best January for S&P 500 since 1997, following on from a near 20% gain for the index in 2017. That was of course until bull run stalled. Last week, US stocks posted their worst five-day performance in two years. From peak to trough, the Dow Jones pulled back by more than 12%.

The nervousness hit equity markets around the world, with the Shanghai Composite declining by nearly 14% from high to low. Many indices found themselves in official correction territory (down more than 10% from recent highs).

Volatility returns

Volatility, as measured by the Chicago Board Options Exchange (CBOE) VIX Index, also referred to as the Wall Street ‘fear gauge’, jumped by nearly 116% last Monday, rising to an above-50 reading on Tuesday, a level not seen since the flash crash in August 2015. Short volatility products, for example the XIV ETN, which was popular among some retail investors, blew up as bets on low volatility went radically wrong in a short space of time.

Melt-up again or risk off?

So far this week we have seen a three-day rally for US stocks, clawing back around half of the losses from last week’s sell-off. The question that market participants are left pondering is whether the market melt-up will resume, or if the sell-off is a signal that now is the time to take risk off the table.

Hold the bear

In this interview, Harry Colvin, Director and Senior Market Strategist at Longview Economics, says a 1987 style crash can never be ruled out, but he is not expecting a large bear market at this point.

S&P 500 corrections chart

S&P 500 corrections chart

S&P 500 corrections chart

In his view, a bear market is normally associated with either a recession or some sort of crisis. Colvin says there is nothing to suggest a disastrous event is on the horizon. In fact, he says the macroeconomic fundamentals are very good.

Correction has third phase retreat yet to come

Colvin says that normally these pullbacks, those are not related to a recession, play out in three phases. Firstly, there is an initial leg lower, followed by a relief rally, which could last one to two weeks, followed by a final wave of selling in which equities retest or even break below the lows from the first wave. Colvin says it looks as though we are currently in the midst of a stage two relief rally.

This information has been prepared by IG, a trading name of IG Australia Pty Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

Find articles by writer

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. You do not own or have any interest in the underlying asset. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money. Please consider the Margin Trading Product Disclosure Statement (PDS), Risk Disclosure Notice and Target Market Determination before entering into any CFD transaction with us.

The value of shares, ETFs and ETCs bought through an IG share trading account can fall as well as rise, which could mean getting back less than you originally put in. Past performance is no guarantee of future results.

Please ensure you fully understand the risks and take care to manage your exposure.

The information on this website is prepared without considering your objectives, financial situation or needs. Consequently, you should consider the information in light of your objectives, financial situation and needs.

This website is operated by IG Australia Pty Ltd. IG Australia Pty Ltd is located on Level 32, Queen & Collins, 376-390 Collins Street, Melbourne, VIC 3000. ABN 93 096 585 410, Australian Financial Services Licence No. 515106. Derivatives Issuer Licence in New Zealand FSP No. 684191, NZBN 9429047618251.

The information on this site is not directed at residents of the United States or any particular country outside Australia or New Zealand and is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.