We saw a little respite last week with the FTSE 100 rallying by 4.7 per cent and posting five consecutive positive days. This is noteworthy because it is the first time this has happened since the end of July, after which we have seen nothing but weakness, turmoil and volatility.
So what brought this about, and is it for real or is it a temporary interlude before normal service resumes and we plunge back down and below 6,000?
Performance of index since the FTSE’s peak
Source: FE Analytics
It is very easy to get consumed during times of extreme weakness and strength by the inevitable aura of doom or euphoria and forget rational thought. As human beings, the behavioural biases of fear and greed are a very natural reaction, but can lead to very poor investment decision making. 
It is important to examine what the catalyst was for last week’s move, and to decide whether something fundamental has actually changed for the better.
Unsurprisingly, the areas of the market that have recovered the most have been those which have been the weakest; namely, mining, commodities, oil and gas. The laggards have been commercial property, general retailers and leisure, which have all been beneficiaries of strong consumer spending resulting from the low oil price and also investment in property development projects with very low interest rates.
Performance of indices in October
Source: FE Analytics
To us, this looks like a so-called ‘dead-cat bounce’ where temporarily the bears take a breather, close out some profitable short positions, and in low volumes, this can easily cause quite a strong snap back in markets.
The main catalyst for this was a growing feeling that the US Federal Reserve Bank had not only missed its opportunity to raise interest rates in September, but it also seems highly likely that the third quarter US reporting season will see cautious statements looking forward couched in the China effect.
The temptation for any Chief Executive to manage down expectations in the hope that they will be beaten is always irresistible, and when there is potentially the best excuse for at least five years, no doubt, China will be the biggest negative threat to earnings we have seen for some while.
This feature will mean that sentiment is likely to be negatively influenced over the next few weeks.
It therefore follows that when the Fed gets to sit around the table and debate interest rates, it is unlikely that they will move in the face of a deteriorating business environment outlook. This was not lost on the market last week and expectations for the first interest rate rise have now moved out to next year.
Another positive catalyst was the announcement from Glencore that it is closing down a third of its zinc production. This is key to a stabilisation in the prices of commodities and is the first significant evidence that the demand and supply pricing mechanism is at last starting to lead to supply reductions.
Performance of stock versus index in 2015
Source: FE Analytics
The share price ended the week 88 per cent above its low on 28th September when it was widely reported to be worth nothing if commodity prices remained at the current levels.
Most bear markets see a point of capitulation and panic, usually characterised by a sensational story which the media exploits to the maximum.
With Glencore, the analyst behind the recommendation may have wanted to grab the headlines but causing a 30 per cent fall in a FTSE-100 stock is quite an achievement, and very illustrative of how nervous the market is with regard to the fortunes of commodity producers.
We can still see significant negatives ahead in terms of global economic growth, fuelled by the US reporting season and a Fed which is increasingly looking impotent. Third quarter Chinese GDP is released next Monday and that is every reason to be cautious.
In addition, the respective camps for the EU Referendum in the UK are setting out their stalls this week, which has every ingredient to become the next brick in the wall of worry.
Tough and frustrating times for investors but remember that fortune favours the brave, and in the current environment, patience!
Guy Stephens is managing director at Rowan Dartington Signature. All the views expressed above are his own.
