A second stock sell-off could resemble a crisis-level plunge like the one that followed Lehman Brothers’ collapse before the 2008 financial crisis, according to Nomura.
An Asia-based financial services group, Nomura based its prediction on data showing hedge funds fleeing the market and said more are set to exit when their algorithms are triggered by rising volatility, CNBC reported.
“At this point, we think it would be a mistake to dismiss the possibility of a Lehman-like shock as a mere tail risk,” said Masanari Takada, Nomura’s macro and quant strategist, in a note.
“The pattern in U.S. stock market sentiment has come to even more closely resemble the picture of sentiment on the eve of the 2008 Lehman Brothers collapse that marked the onset of the global financial crisis.”
After the market bled on Aug. 5, Takada said that the full market plunge could in-swing by the end of August or early September as soon as bullish trades unwind.
He warned that any rebound in the stock market before that would be an opportunity to sell.
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Nomura’s gauge is signaling that the S&P 500 could drop by about 20 percent on average and by about 40 percent in the worst-case scenario, mirroring the plunge that the benchmark took in the six months after Lehman Brothers filed for bankruptcy in September 2008, Bloomberg reported.
“We would add here that the second wave may well hit harder than the first, like an aftershock that eclipses the initial earthquake.”
