The market’s so-called depth has become so shallow that stocks are increasingly vulnerable to exacerbated moves, according to J.P. Morgan

  • The market’s so-called depth has become so shallow that stocks are increasingly vulnerable to exacerbated moves, according to J.P. Morgan.
  • Market depth here is measured by the volume of orders on both bid and ask side for the S&P 500 E-mini futures contract.
  • “In our mind, this persistently low market depth leaves U.S. equities vulnerable from here if central banks fail to validate market expectations or U.S. recession risks resurface,” says analyst Nikolaos Panigirtzoglou.

 

Danger is lurking in the stock market: A monster sell-off could be around the corner if the Federal Reserve doesn’t deliver the rate cut the market expects next week.

That is because the market’s so-called depth has become so shallow that it is increasingly vulnerable to exacerbated moves, according to J.P. Morgan. Market depth here is measured by the volume of orders on the bid and ask sides for the S&P 500 E-mini futures contract. A “deep” market is able to prevent a large order from moving prices significantly.

“In our mind, this persistently low market depth leaves U.S. equities vulnerable from here if central banks fail to validate market expectations or U.S. recession risks resurface,” J.P. Morgan analyst Nikolaos Panigirtzoglou said in a note to clients last week.

The S&P 500 has risen a stellar 19% this year, but the strong performance has been accompanied by light inflows and trading activity as well as low market liquidity, the analyst pointed out. The average market depth has been close to historical lows, he said.

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