Prepare for 'aftershocks' after the global market earthquake

Face punchYouTube/Epic Slow MoPunched in the face.

It’s not over yet.

The market turbulence in the wake of the UK’s decision to leave the European Union was intense, leading to the eight-largest point total drop in the Dow Jones index ever on Friday.

While stocks took a turn for the better on Tuesday, the unpleasantness may not be over yet, according to JC O’Hara at FBN Securities.

“The global markets had extreme selling on Friday. Many of our indicators spiked to levels not seen in months/years,” said O’Hara in a note to clients Tuesday.

“Typically, this sort of volatility is not the ‘one and done’ kind but rather aftershocks are expected after the global earthquake.”

O’Hara pointed to the fact that in recent years downturns, such as the financial crisis and the European debt problems produced not just an initial drawdown, but also smaller subsequent reactions in the days that followed.

To be fair, there are differences. Whereas the financial crisis and euro debt issues were ongoing affairs with twists and turns, the Brexit vote began with a discrete event — a referendum. While there are many unknowns surrounding it, the key surprise of the UK leaving the EU has occurred.

The Brexit downturn, however, does appear to be different from other recent drop-offs that lead to quick recoveries.

“When a small part of the market experiences turbulence it has the ability make a speedy recovery or that ‘V’ shaped pattern we have grown accustomed to,” wrote O’Hara.

“When global markets, in unison, are hit, the recovery on average is not as robust and more often than not, choppy trading ensues.”

O’Hara said that he was bullish on US stocks, but had his eye on a key critical events including the Brexit vote. Now with the ensuing shake-up in stocks, O’Hara has gotten more cautious.

“In light of the global volatility, we need to alter our outlook on US stocks to a more neutral stance,” he said.

“This is not to say that the S&P 500 is all doom and gloom but rather downside risks have substantially increased with the injection of fresh global volatility. The risk/reward does not favour being caught too long.”

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