Calm, Calmer, Calmest – Which one are you?

26 Jan 2016

As is typical in the majority of market corrections, participants are only able to focus on a handful of themes at any one time which then unfortunately can foster herd like mentality and can produce volatile market swings. The month of January has been no exception as our first chart of the week shows. The speed and strength of the selloff as measured by the Russell 3000 has only been seen in three previous market selloffs over the last eight years, all with clear and identifiable catalysts. As emotion takes over, disbelief lulls market participants into looking like a communal group of deer caught in headlights, waiting for it to end.

The primary culprit this time around was the volatility in oil stemming from oversupply concerns as it marched ever closer to USD 30 a barrel. The momentum and conviction of short sellers intensified, pushing oil to a low of USD 27. As cross asset correlations reached near record highs, everyone began scrambling to declare themselves a self-taught energy market analyst. Figuratively speaking, markets peak when the last buyer has bought and bottom with the last seller selling. Our second chart of the week shows the strength and intensity of oil shorts which, by Thursday, also provided the first indication that a local bottom may be closer as the net short positions, as defined by oil Exchange Traded Funds (ETFs), began to decline.

Last week’s price action in global equities, while headline grabbing, were only a continuation of their trajectory lower as chart 3 shows. The MSCI All-Country World Index is down 19% from its 52-week high last May, which some would suggest is at or near a bear market correction. Explanations for the decline range from slowing global demand, over-supply in commodities, and the end of easy monetary policy from the US Federal Reserve. Whatever the case may be, market corrections are a process, not point. As market practitioners, we constantly assign intrinsic values to our investments. When that value of an asset is higher than its price, one should buy. Conversely, if the asset price is higher than its intrinsic value, then one should sell. The market volatility and price action over the last couple of weeks, and arguably the last year and a half, have been in the process to identify the new intrinsic value of asset classes given the economic, monetary and structural changes present in the market.

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