Volatility Returns With A Bang
The sell-off was sparked by a surge in interest rates linked to stronger growth and rising inflation. Investors are increasingly expecting that the Fed will be forced to raise rates at a quicker pace than is currently expected in response to these improving conditions.
While the selling was of a fairly normal volume initially at the beginning of last week, the rout quickly accelerated, and the market collapsed Friday, Monday and Tuesday, before halting and putting in a recovery bounce.
Algos to Blame For Velocity of Losses
The speed and pace of the sell-off once again highlights the role that algos and high frequency traders have in these types of scenarios, quickly amplifying losses with the velocity of machine-driven selling. To put this in perspective, the Dow at one stage sold off by over 800 points in 10 minutes, with trading volume at its second highest level for a decade. Similarly, on Monday, the S&P500 fell by 4.1%, its biggest percentage fall since summer 2011, when the US had its triple-A credit rating removed.
The selling was not just confined to the US either. Asian benchmarks suffered sharp losses also with Japan’s benchmark, Topix falling 6.3%, marking its biggest loss in 19 months. The South Korean Kospi Composite also fell 2.6% while the Australian S&P/ASX 200 fell 3.7%.
Some Analysts Calling “Buy the Dip”
The severity and velocity of the declines were significant in terms of market records. Some of the more optimistic analysts are highlighting the fact that the market is only really back to where it was in mid-December of last year and so we haven’t seen a devastating collapse that has wiped out a year’s worth of returns. In fact, many of the bullish players are calling this a fantastic opportunity to buy the market at a discount before the bullish trend continues now that many of the speculative players who bought the trend in its latest stages.
However, other players are not convinced and say that this is only the start of a much bigger sell-off to come as the Fed responds to rising inflation and stronger growth with an aggressive hiking cycle. While the selling might not be of the same ferocity as we’ve seen over recent days, it is possible that the tide of ever surging equity prices is changing in the face of a Fed who appear far more committed to hiking than they have done previously.
The recovery from Tuesday’s low saw price trading back up to hit the 50% retracement of the decline from the year to date high. While price remains below the 50% retracement, stagnation is expected to continue with focus on a move back down towards the low. A break of the 50% level will likely see a laboured drift higher.
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