Andrew Lees of UBS writes:
Yesterday’s equity rally was fascinating; not because of the excitement it has caused but because of the sheer lack of interest and belief. Having spoken to half a dozen people this morning about it, without exception no one either bothered to try and explain it or thought anything of it, and certainly no one even remotely suggested that it may be the start of something bigger. This is very understandable; business risk has removed any interest in the business of making money.
Whilst people talk of “revulsion” at market lows, this complete lack of interest and dismissal of yesterday’s move or the potential for any reason for anyone to commit capital, is exactly the same thing. What is more, we don’t need a huge amount of capital to lift this; rather we need a reduction in the selling pressure. We are set up in a similar way to some of the big 2002 rallies whereby there are a large number of deep in-the-money puts out there. As these approach expiry, unless they are converted to physical sales rather than cash sales, then there will be a lot of buying needed to happen.
This would not be an expiry effect only lasting a day or two before expiry, but would be like 2002, a monthly kind of move. It is also worth remembering that in 1974 10 day volatility exploded when the market rallied from its lows as the S&P jumped 17% in just one week – (the Shanghai Composite is now up 16% from last weeks low, and there is speculation of a rate cut at the weekend according to Bloomberg). One other aspect on business risk is that if we do have a sizeable bounce from here, then hedge fund business risk may change to that of underperforming mutual funds etc.
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