This information has been prepared by IG, a trading name of IG Markets 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. See full non-independent research disclaimer and quarterly summary.
The first week of September really lulled investors into a false sense of security, broadly replicating as they did the rangebound trading of July and August. Events billed as vital, such as the European Central Bank meeting, were actually relatively quiet in terms of market reaction. Instead, it was a speech by Eric Rosengren, not usually the most closely-followed Federal Reserve member that was blamed for the sell-off.
In reality, the market’s tantrum extended beyond mere unhappiness with poor Mr Rosengren. The Fed continues to threaten a possible move in rates, while the European Central Bank has held off more stimulus and the Bank of Japan is seemingly gripped by policy paralysis.
Short interest has been steadily declining since its peak in the first-quarter of the year, increasing the risk that everyone is on ‘one side’ of the trade (ie the long side). When the reverse happened in Q1, the rally caught everyone off guard, and continued as investors (both institutional and retail) continued to short the rally. Markets have enjoyed a powerful rally off the lows seen after the Brexit announcement, and complacency ruled in rangebound US markets. Buying the lows in a rangebound market is usually a great strategy, until the final dip which turns into a sell-off.
This dip could continue for a few more days, but as volume returns and bargains emerge, I would not be surprised to see a fresh rally. Indices have recovered spectacularly since the February lows, and are still within easy touching distance of all-time highs in the US. The charts would back this up.