The sharp pullback and volatility seen by global equity markets recently is far from finished with a “third wave” of market correction still ahead, says Chris Watling, chief executive at Longview Economics in London.
“The idea that it's all done in one sell-off is, I think, probably a triumph of hope over reality,” the analyst said, as quoted by CNBC.
The warning comes as investors are still concerned over the recent sell-off that saw another significant drop in American stocks earlier this month with indexes around the world plummeting amid fears of rising interest rates and higher inflation.
Sell-offs tend to happen in three waves, according to Watling, who refers to market analysis and history.
“You get your vicious first wave sell-off that we had with the high on January 26 in the US, then you get your typical wave two relief rally which we had last week when the S&P was up 6 percent, the best weekly performance since 2011, then you tend to get a third wave to either new lows or testing the lows from the first wave of the sell-off,”the strategist told the media.
Watling stressed that prior to the first wave in late January, investors saw “two years when the market pretty much went up in a straight line and the complacency was huge.”
“There's huge complacency. Everyone's talking about a 'healthy market correction' but generally when you have proper pullbacks people are slightly fearful of the bottom – they're not regarding it as wonderful. So, typically, that 'third wave' is key and I think there's probably some more downside risk over the next few weeks,” the analyst said.
He added that while he believed equities were still in a cyclical bull market, declining liquidity was “dangerous.”
“This has been the most heavily, liquidity-fueled bull market ever. So sniffing taking it away, which was perhaps what the correction was about in January, is quite a dangerous environment,” Watling said. “I'd be very nervous, in the medium-term, about what happens when liquidity is withdrawn.”
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