Are we likely to see a market correction soon?

The rally for US equities against the backdrop of the pandemic is creating the perfect conditions for a rush into risk assets for those investors who are watching in disbelief as the markets continue higher and are therefore likely to buy once again at precisely the moment the market makers are selling into the next wave of negative news. This is the fate of the ‘Johhny come lately’ who buys at tops on the fear of missing out (FOMO) and is panicked into selling at a bottom.  So the question for them, is simply this – are we likely to see a market correction soon, and if so when? And there are four ways to answer this question, using price, volume the VIX and the fx markets.

First the price action. The rate of upwards momentum is relatively slow with the daily spreads less than average, suggesting nervous buying into the extended rally. Second volumes are generally good, and as such one would expect better-defined price spreads than we have seen over the last few days. Third, note the VIX which has yet to fall to the low double-digit numbers of earlier in the year, and continue to descend lower with stately progress. It is hardly representative of a wholesale abandonment of fear and currently trades at a lofty 26.7 at the time of writing. Remember in the past we have seen this number achieved on reactions of weakness in equities, yet it is only now being tested after this extensive rally. Finally, what can we conclude from rampaging yen pairs which continue to recover strongly and climb ever higher?

Put this all together and we have some strange disconnects at present and as such it would be wise for those thinking of jumping in as longer-term investors, to be patient as this combination of factors suggests there is a correction on the way and may not be long in coming. But note the word correction which is what it may simply be – another in a long list of buying opportunities for the market makers.  What the trigger will be for such a correction remains to be seen and ranges from the pandemic to the ongoing tension between the US & China. It will be whatever grabs the most headlines.

By Anna Coulling

Charts from NinjaTrader and TradingView, and indicators from Quantum Trading