Preparing for the correction

Trading volumes will probably start to fall away as we enter the holiday season; in contrast, this is often the time volatility can pick up. Many investors probably expected the sharp rise in the Vix signaled the start of a summer dip, but by the end of Monday, last week's shake out seems at present to be quickly put behind us.

Apart from the sharp rise in the Vix that saw it briefly rise above 15 points there are limited signs of rising tensions in other asset classes. Russian bond yields that rose sharply earlier in the year have fallen back recently, despite the threat of increased sanctions. The Brent crude oil price that hit $115 a barrel last month now trades at $107, the Vix has once again fallen back to below 13. The US dollar that is often seen as a safe haven in times of heightened stress remains close to its recent trading range. The gold price that often attracts capital in times of stress has risen slightly, but remains well below the highs of a year or so ago.

Picking ones way through the latest research reports, one house reported that nearly every investment manager they spoke with expects some form of market correction. This report also points out as we often do that these corrections rarely occur when investors expect them. The correction everyone refers to is the American market, as the S&P 500 continues to trade close to all time highs.

Looking across most other developed markets, the correction seems to be taking place. The Eurostoxx 50 has given up 8% of its gains and is now pretty much back to where it started the year. The FTSE 100 still struggles to break through its all time high and has now given back 5% of its recent gains, as has the Dax index of leading German companies. The Nikkei 225 index of Japanese stocks has fallen about 7% from its recent highs. The conclusion must be that like the investors in the recent survey most of the developed markets also expect a correction, in U.S. equities they also don't know when it's coming, but are possibly preparing for it as well. 

Posted on July 22, 2014 .