After being lulled by several months of mundane days in the markets, even people enjoying the last few vacation days of summer on the beach were likely snapped awake this week. Today the U.S. equity markets lost over 3%. For the first time since 2011, the markets are down over 10% from their recent all-time record highs. Pawleys Capital Management views this move as a healthy exhale and a potential opportunity for investors to move cash into the market. Typically the markets will correct between 10-15% during a given year, and as long as the underlying economy is healthy, we view these moves as opportunities. Usually it takes 15% to get our attention, but a few key occurrences warrant attention and may be indicating that the next few trading days mark a meaningful time.
Today the VIX (volatility index) rose a dizzying 46%, and the breadth of declining stocks represented well over 90% across the markets. These indicators may signal a significant capitulation point. But what risks do we see? Weakness in China will have a modest effect on global equity markets. Yesterday the Conference Board released the Leading Economic Index for July of -0.2%. The slight drop may not seem meaningful, but we will be on alert to see if the negative trend continues next month. Until the yield curve begins to flatten, we think that deterioration in the LEI’s is unlikely. And the move in the VIX and the breadth of decliners may indicate that the window of opportunity provided by this sell-off will be short-lived.
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