With almost everyone cashing out lately, it didn’t take much to drive the 2.6 per cent gain in the S&P 500 in an everything-rally attributed to hopes of a less-hawkish Federal Reserve and the fading U.K. market crisis.
“While we could still see further de-risking, it’s possible we don’t get a clear sign of broad capitulation because positioning is already quite low,” the JPMorgan team including John Schlegel wrote in a note. In the view of Ed Yardeni, the president of Yardeni Research, things are already breaking in markets, as signaled by a relentless rally in the dollar, and the Fed should consider stopping tightening after one more interest-rate hike in November. He pointed to Bank of England’s dramatic market intervention last week to stem a collapse in the British pound and U.K. government bonds as a possible template for other policy makers to follow.
The rationale behind such exercises is the idea that when everyone is rushing for exit, that leaves a smaller pool of traders to sell stocks, thereby forming a floor for the market. Many tools have been designed to measure sentiment, including metrics on positioning, trading volume and volatility. But broadly speaking, there was no sign of panic selling. Trading volume exceeded 12 billion shares on Friday, but that paled in comparison to mid-June, when about 19 billion shares changed hands.
I suspect there will be more selling as PE ratios are still very expensive.
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