Correction: What happened and is it over?

Correction: What happened and is it over?

Much has been written about the stock market correction in February. Meeting the traditional definition, peak to trough, markets fell more than 10% (the market peaked January 26th to bottom February 8th).  Since the lows, it bounced back substantially.   

What drove the correction?

We have heard the blame laid on “computers”: algorithmic/program trading, CTAs, quants, stop-loss selling – the list goes on.

But as we tabled over the last few months, inflation concerns have been building for some time as central banks voiced concerns and took action with rate increases while alluding to more. At Auspice we experience inflation concern as demand for commodity products that increased in late 2017 and early 2018 actually rising in the first week of February - despite the stock market sell-off.

Additionally, there has been a growing discussion regarding the over-valuation of stocks yet  the market kept moving higher while other assets are at historically low levels. Commodities are in this camp. Correspondingly the VIX was at all time lows.  The trade that kept on giving until it bit back as volatility expanded quickly.

Further discussions of “FOMO” was used to describe the market action.  The “fear of missing out” is simply putting a new media acronym for “herd behavior”.  Scary if the only reason for a market to be going up is FOMO. But more importantly, if the market is driven by “FOMO”, then it should be no surprise that it is fragile enough to quickly and sharply correct. 

What is the trend? The long term trend in equity has indeed been up - for over 9 years. However, the trend is at question if we retest the lows. We started exiting long trends in equity in January (as well as covering the VIX short) and further exited all equity exposure in early days of February. While we don’t have a crystal ball to market direction, what we do know is the low volatility regime for the markets and economy is likely over for now.

To keep in mind: There hadn’t been a correction in over 2 years which is one of the longer periods without a correction in 80 years. Remember, corrections are normal, they are frequent (36 times in the 38 years since 1980) and likely to happen more often after having been so infrequent for so long.

Given a return to more normal volatility, and a heightened concern for further “corrections”, we believe this is not over.  Stay tuned for more volatility regardless of ultimate direction.




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