As traders will, accurately, point out based on technicals stocks are significantly oversold on short-term time horizons, and are thus due for a rebound. Case in point JPM's Misla Matejka who said overnight that "we note that some of the tactical indicators we follow, such as Bull-Bear at -16, are in oversold territory. This argues for a bounce in the short term...”
However, as watchers of broken markets will likewise caution, on a long-term horizon markets are massively overbought, mostly courtesy of over 7 years of central bank intervention and record stock buybacks, interventions which may be coming to an end, bringing us to the second part of Matejka's assessment: "... but we believe that the key call here is to use any rebounds as selling
opportunities. Q4 results are unlikely to provide clarity."
So what is one to do?
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One attempt at an answer comes from Mark Cudmore, a former FX trader who now writes for Bloomberg News:
Observe And Consider
Whether you’re bullish or bearish, the next couple of sessions are likely to be difficult to trade. There’s little risk-reward for those investors who have the option of standing aside to observe.
Longer-term investors will have noted the severe technical damage seen across the vast majority of markets and asset classes last week. And the negative headlines in weekend papers are likely to spur further retail outflows this week.
Shorter-term traders will feel that many moves have gone a long way very quickly and hence appear ripe for a brief rebound. The catalyst is that, in the height of a market panic, prices can become dislocated from fundamental valuations, as margin stops get triggered and “weaker” positions get cleaned out.
The counter-argument is that distortions caused by the extraordinary monetary policies of global central banks mean markets might have been disconnected from traditional fundamentals for several years.
Liquidity will remain at a premium. Both bulls and bears can struggle in risk-averse markets as the negative wealth impact results in deleveraging which, in turn, reduces participation. Spreads widen at the exact time that market- makers appetite for risk declines, making execution more expensive and messier.
This makes relative value trades much tougher to hold, further lowering the incentive to even try to arbitrage value across similar assets, even for those who remain agnostic on overall market direction.
Overnight price action in the South African rand provides a perfect example of what can go wrong. On Friday, the weakness appeared “stretched” -- with one technical indicator showing the currency at its most oversold in 14 years. Then the rand plunged another 9% in early Asian trading.
