The US markets display classic sell-off and recovery patterns
From April to July most equity markets were in decline before the big sell-off of August. The exceptions were the large US indices (S&P500, Dow Jones and the Nasdaq) which traded sideways over this period before also selling off. The subsequent August to November movements illustrate the three month cycle that Camomille models. While we don’t aim to predict the peak before the sell-off, we are confident that once a sell-off occurs, we can map the recovery thanks to our in-depth understanding of human behaviour and how numerous biases can affect the trading behaviour of market participants.
Month 1: Sell-off
The sell-off for all markets was sharp and generally lasted about a month to the end of August before retracing 50% of the decline. The various reasons and explanations for the sell-off are incidental to our strategy.
Month 2: Consolidation
This was followed by a somewhat volatile yet range bound period of a month. The consolidation was shocked somewhat by the Volkswagen scandal at the end of August but a combination of loss aversion and the ability of investors to ‘rationalise’ the pain of the initial sell-off predicated market consolidation.
Month 3: Recovery
Finally two months after the first signs of the sell-off, the markets retested lows before recovering into the third month.
By the end of month three (November) a recovery was seen in all markets although the extent of this recovery varied by region.
A global view
With the exception of the Russell 2000 (small cap index) the other US indices (S&P500, Dow Jones and Nasdaq) all regained beginning of August levels, shutting out media narratives regarding China growth concerns and the future of US interest rates
European and EM indices followed the same sell-off, consolidation and recovery time pattern as the US but only recovered 60% of the decline in the third month.
Sell off, consolidation and recovery pattern of markets, August 2015