Wall Street stopped bleeding after two days of heavy selling, with Dow, NASDAQ and S&P 500 rebounding 2.3%, 2.1% and 1.7% respectively last night.

Market’s ‘Fear gauge’ - CBOE Volatility Index has come off to 29.9 area this morning from an eye-watering level of 49.2 saw yesterday. Asian markets are positioned to open higher amid improved market sentiment overnight.

This is probably the fiercest correction we’ve seen since 2011 European financial crisis. The overly suppressed market volatility was like an active volcano, which erupts from time to time. Due to heightened market volatility during a short period of time, an Exchange Traded Note (ETN) issued by Credit Suisse, which allows investors to short volatility lost 96 per cent of its value overnight on Monday and the issuer, is planning for early redemption of the note.

This indicates how wild the market can go when everyone is in the mood of complacency. Fundamental elements remains on the strong track and interest rates has been rising steadily over the past two years. The problem is that markets chose to ignore the negative monetary policy factors until recently and attempted to price-in all factors at once. The rout also warned hedge funds and institutions who keep shorting market volatility over time and taking it as ‘free money’. Nothing is free in this market

So is the equity market rout finally over? I believe it is a matter of time when market start to calm down and re-focus on earnings and fundamental elements, which are delivering consistent positive surprises. A stock market crisis is unlikely to happen when economies are expanding and earnings are improving.

Singapore’s Straits Times Index rebounded 40 points this morning to 3,450 area. The downside is cushioned by improved fundamental elements and relatively low valuation; therefore, value investors should have confidence about the market outlook beyond this correction.

Volatility Index – Feb 2018

 

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