Correction or ‘bear market’?

The recent stock market correction was triggered by the rise in bond yields, then amplified by the forced liquidation of some short volatility ETFs – not by fundamental changes. 

Correction or ‘bear market’?

These changes remain solid, supported by synchronized global growth and continued positive momentum in corporate earnings. On this basis it is difficult to envisage a bear market generally extending over one or more years. We would rather be in a phase of healthy correction that lasts on average not more than 4 months.

That said, the context of higher volatility could last longer and we may not have seen the bottom yet. Bond yields continue to rise, offering an alternative to equities and increasing financing costs. The rise in inflation in the United States could also continue with the weakness of the dollar.

The SP500 retraced 61.8% of the correction and could be facing some resistance. Typically a correction has 3 phases according to Elliott wave theory. A first drop (A), a retracement (B), then a second drop (C).

Resistance: 2750 (61.8% retracement of the correction), 2790 (76.40% retracement of the decline), 2870 (record high).

Support: 2580 (year low on close basis), 2530 (bottom of wave A), 5480 (50% retracement level of the whole ‘Trump’ rally).

Correction or ‘bear market’?

The information 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 Bank S.A. 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 and as such is considered to be a marketing communication.