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Recognizing Market Distortions Doesn't Dissuade Trading On Them

Recognizing Market Distortions Doesn't Dissuade Trading On Them

John Kicklighter, Chief Strategist

Talking Points:

  • By most traditional measures of 'value', the markets are richly priced amid stimulus and a reckless reach for yield
  • In a poll, the largest segment of respondents (34%) expected a significant market downturn within a month
  • Despite another poll showing skepticism in value highest for equities, it wouldn't dissuade trading appetite

See how retail traders are positioning in the majors using the SSI readings on DailyFX's sentiment page.

The draw of profit can make investors do strange things. By most accounts, the market is besieged by a desperate chase for yield. But, a backdrop of extreme monetary policy accommodation and preternaturally low volatility levels has driven market participants to lower their guard on risks in pursuit of increasingly elusive, market-beating returns. This is not a new state of affairs. This 'reach' is now so perceptible that the members of the world's largest central banks now frequently cite it as a concern when weighing the detriments of their extraordinary effort. Yet, recognition of this imbalance has done little so far to temper authorities' efforts. What is far more trouble though, is that investors likely recognized this far earlier and are just as willing to play participant so long as the distortion is maintained. As confidence in this theme grows thin however, we will recognize just how exposed we are.

With the expected seasonal transition in market conditions from Summer doldrums to Fall activity underway - though structural curbs are still casting imposing shadows - I ran a poll: when would the next major market correction/tumble occur. A major market fall would not be a 5 or 10 percent slide, but something more robust. In the results, 34 percent expected it to occur within the month of September, 27 percent in 2 to 3 months, 19 percent in 4 to six months and the balance of 20 percent expecting it to be longer. That innate expectation of volatility is common. Yet, if such fears (or hopes) are real, we would expect investment habits better aligned to this change in activity. That said, even with a serious concern that assets are distorted or manipulated (another poll); traders would still chase the same positions that epitomized the distortion when presented with scenarios of significant market moves higher or lower. We look at traders' responses to a series of polls with context to the recognition of broad market imbalances in today's Strategy Video.

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