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Market Insights

Manic Monday a sign of things to come?

Daily insight

The US100 started the week the same way that it ended the last: Deep in the red, with no signs of a sustained rally to break the relentless waves of selling. We saw a huge selloff in equity markets and crypto on Monday and then came the rally.

Buy the dip (or BTFD) became the mantra for an army of retail investors and day-traders throughout the pandemic. That mantra is in danger. JP Morgan data strategists report that retail investors offloaded a net $1.36 billion worth of stocks by noon yesterday, fuelling the selloff.

Morgan Stanley flagged the drop in retail enthusiasm at the end of last week too, saying

“The bid from retail investors completely evaporated” & “this is a tremendous change from earlier in the week when rolling 1-week average daily flow hit an all-time high pace.”

Whichever group was responsible, volatility went through the roof. The round trip in the US100 was a real rollercoaster ride. Check out the chart:

US100 chart 1

  • Calm through Asia
  • Constant selling through the European session and early US trade (down almost 6% from high to low)
  • Sharp reversal late in the day followed by a strong rally into the US close

The US100 actually closed up on the day! Although it’s worth noting that bulls couldn’t break the highs posted in Asia and the index has tracked sideways since…

The new normal?

Is this a sign of things to come? That’s the question now. It seems a little premature but experienced heads are pointing to these volatile conditions as a sign that “all is not well”. This kind of volatility is more reminiscent of bear market rallies than sustained bullish rallies.

However, there are behaviours that often repeat in markets. Mandelbrot’s theory of volatility clustering says that "large changes tend to be followed by large changes, of either sign, and small changes tend to be followed by small changes". In plain English, the direction is irrelevant. Volatility attracts volatility.

In single stocks, these moves can be even more exaggerated. Shopify’s 23% rally from the lows yesterday was astonishing.

shopify chart

Even Berkshire Hathaway wasn’t immune and followed the exact same pattern, gapping lower on the open before rallying into the close:

berkshire chart

It’s not the right time to draw solid conclusions from all of this. Perhaps it is an early indicator of the “Double I” (Inflation & Interest Rates) uncertainty that seems set to plague equity markets throughout 2022.

So often it boils down to “What will the Fed do?” as the chief liquidity managers of the global financial system. Yesterday we asked if this week’s Fed meeting would lead to mayhem.

If ‘Manic Monday’ is anything to go by, they’ve got an unenviable task on their hands.

Not investment advice. Past performance does not guarantee or predict future performance. Trading cryptocurrency is not available for UK retail clients.