Here’s JPMorgan equity strategist Dubravko Lakos-Bujas on the volatility in the stock market:
Stocks began 2016 on a volatile note with China once again at the epicentre. Much of the recent weakness in US equities can be attributed to technicals with the selloff amplified by (1) the absence of synthetic demand for equities due to the buyback blackout period ahead of the earnings season, (2) very low equity market depth (e.g., liquidity) having decreased by ~60% over the last two years and leaving the market with limited capacity for absorbing shocks, (3) fundamentally insensitive managers (mainly CTAs or trend followers and to a smaller extent Volatility Targeting or Risk Managed strategies) having been sellers of equities on account of increasing volatility and weakening S&P 500 momentum trends that have turned from slightly positive in Dec to outright negative. JPM Momentum Diffusion Index (Figure 67) is now at an extreme low; at such level historically the market had a tendency to bounce back over the subsequent 2-3 months though with high dispersion.
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