Once you replace negative thoughts with positive ones, you’ll start having positive results Wiie Nelson

We expressed some optimism for equity markets at the start of the 4th quarter of 2021. That optimism was slightly misplaced on Monday as US equities fell again by over 1%, confirming the 5% correction from the peak. Tuesday was a better day as equity markets around the globe enjoyed a solid recovery. Citi bank published a report analysing the positioning of fund managers and came to the conclusion that investors are “rapidly switching” to being short. However, in their view net shorting is not extreme enough to force a position driven change in the direction of the market. Monday’s selloff may have triggered more short selling, so we may be closer to the capitulation point. Yields in the ten year US treasury popped back over 1.5%, leading to a strong performance in financials. OPEC refusing to increase oil production led to a further rise in oil prices which fed through into the oil sector. Information technology shares have had a rougher than usual few weeks, and despite the uptick in longer dated yields they too had a good day on Tuesday. Large-cap tech indexes touched their 200-day moving average possibly offering some technical support. Otherwise, the more defensive sectors underperformed including healthcare and consumer staples.

We pointed out, at the end of last week, that there was something of an uptick in the US economic data. The trend has continued at the start of the week. US new orders continued to climb in August. Capital goods orders and shipments were adjusted higher, pointing to robust business investment. Manufacturers are building up inventories to deal with supply shortages.

The dollar is often a good measure of sentiment and as equity markets have been falling in September investors have been buying the US dollar. That trend has changed at the start of the month, adding to the feeling risk sentiment may be improving. Although the Vix index is still materially above where it was at the start of September, the index has retreated in the past few days.

Although there are still things to be concerned about that could rattle sentiment further there are also reasons to be optimistic as economies appear set to continue to grow and money remains cheap. Global equities have risen 90% from their lows 18 months ago, the last time for such a meteoric rise since 1987. The bubble was burst as bonds started to yield double what the equity market could offer. Despite lofty valuations, equities still look better value to treasuries at this point.