Risk-On Momentum in Stocks Succumbs to Mounting Growth Worries

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(Bloomberg) -- The seemingly unstoppable stock market rally is wobbling as it confronts a horde of challenges to the momentum that’s taken it from record...

-- The seemingly unstoppable stock market rally is wobbling as it confronts a horde of challenges to the momentum that’s taken it from record high to record high.A rout early last month was a glimpse of how quickly things can turn bad, a sharp selloff driven by US recession fears that rocked investors used to going in only one direction. While the S&P 500 subsequently rebounded, crucially it didn’t made back all the ground lost.

Frothy valuations have also created new vulnerabilities. Many had to chase the rally and bought at expensive levels, meaning they may sell quickly if things start to reverse, and the market could fall harder and deeper before the usual dip buying kicks in. Additionally, the shift in options trading and the forces of systematic investors are capable of triggering erratic moves and potential avalanches of de-risking.

But whether it was the collapse of banks in the US and Switzerland, or geopolitical tensions such as the escalation of violence in the Middle East, the market reaction proved to be temporary. Equities quickly bounced back and powered on to new highs. Other risks from investor positioning arise from approaches such as so-called trend followers or volatility controlled funds as well as the options market, increasingly dominated but very short-term trading. Trading flows from those investors can reinforce intraday swings, seen recently during the early August slump.

Meanwhile, demand weakness in China — a key market for makers of luxury goods, cars and machinery – is hitting earnings.

 

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