As it stands, a bullish 90% of UK 100 constituents look set to finish the week higher. This compares to just 4% last week, and 12% the week prior, as investors fretted about volatility and the outlook for interest rates. Does this mean the recent 10% correction is complete, and the recovery is on? Quite possibly.

Some say markets don’t correct (10%+ fall from highs) and bottom out in just a week or two, needing longer to digest things and reflect on where they come from and what took us from the top. In some ways I agree. In others I don’t. Recent market volatility saw the end of a period of extremely protracted complacency, the latest leg of a market rally that can be traced back to Feb 2016, failing to be tripped up by either Brexit or Trump. Investors may need time for the dust to settle, and a 3% bounce is perhaps not enough proof. However, it could merely be the opening sequence for the next leg higher.

UK 100 bounce off April 2017 lows

Looking back a few years, the May 2013 ‘taper tantrum’ sell-off (fears of less stimulus from the US Federal Reserve) saw the UK 100 fall over 12%, but took only two days before bottoming out and rebounding by over 10%. And this was from a flirt with its turn-of-the century peak, not dissimilar to where we have just come from. October 2014 saw the index give up another 12%, to flirt with the aforementioned May 2013 base, amid concerns about growth, inflation, US data, geopolitics and ebola. The 11% rebound started just a day later, and took only a month. And even though it was followed by another near-10% correction in early December, almost taking us back to square one, both took only a day to reverse, the latter being followed by an 8% Santa rally.

The China inspired sell-off of late August 2015 (concerns of growth slowing) was a little more complicated, culminating in a 15% UK Index drop (19% from April highs) and an 8% rebound, only to sell off again and trade sideways in a wide range, taking a full month before bottoming out and bouncing by a full 10%. Even after that we saw multiple near-10% corrections and retracements along the way, assisted by the Fed staring to hike interest rates again, before finally troughing in Feb 2016. But it wasn’t plain sailing from there either, with another correction in Apr/May 2014 (volatility surged), but the index twice turned on a sixpence to rally back hard.

So it’s difficult to say whether or not we need to correct further. In some ways taking a whole week to bottom out almost seems generous, and the 3% bounce could well be a sign of things to come. On the other hand, and putting on my Chartists/Technical Analysis hat, I see two things that concern me. Firstly is the risk that the current bounce means we are looking at a bearish flag pattern which ultimately sends us lower (6700, Nov 2016 lows?). No guarantee. We may need to rally a bit further for the flag to be in proportion with the recent sell-off correction from record high.

Secondly is the risk that we continue to focus too much on the short-term, ignoring the longer term, another example of the risk of complacency we talked about last week. The UK Index rallied 130% in 1995 to its turn-of-the-century dot.com highs (3000-7000) before falling 53% by March 2003 (3275). We then rallied another 105% (3275-6780) before the financial crisis ushered us 48% lower by March 2009 (3500). And it was from here that we began a post-financial crisis, central bank stimulus, low/negative rates, QE and low volatility fuelled 138% rally to recent highs (3275-7800), the last leg even embracing rather than fearing any normalisation of monetary policy and higher interest rates.

UK Index 1993 to 2018

In which case, looking at a long-term chart, are we not due a 17% sell-off (implying another 7% downside) such as we saw in April 2010, or a 20% drop like in in August 2011, a 12% decline as we saw in May 2012 or a repeat of any of the bigger corrections mentioned earlier. Perhaps even a brief spell in full-on Bear market mode (down more than 20% from most recent peak) such as we saw from May 2015 highs to Feb 2016 lows.

One thing for sure, is that the above debate continues with ferocity amongst analysts, media and investors alike. Everyone wants to know if we’ve hit the bottom or have further to fall, because our human instinct is to buy low and sell high, making the most of any rally, watching the value of our investments grow. The rebound may have already started; we could have further to fall. Bears will be eyeing any breach of recent lows to trade any further declines.

Until we all know for sure, stay in touch with the markets via friendly and helpful traders and analysts such as those at Accendo markets, by getting access to our research. We’re not here to call the bottom (risky business, no crystal ball), rather be alert to when it happens. So, get in touch, stay in touch and profit from the market bottom.

Have a nice weekend.

Mike van Dulken, Head of Research 16 Feb 2018