"[I]t would be a mistake to dismiss the possibility of a Lehman-like shock as a mere tail risk"

Investors shouldn’t take much solace from Tuesday’s slight rebound from the worst day of the year because the next sell-off could be even more violent, something resembling a crisis-level plunge triggered by the collapse of Lehman Brothers, according to Nomura.

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This view is much more catastrophic than the rest of Wall Street with most firms predicting a stock market correction (down 10%) at most and likely just a slight pullback. Nomura is basing its view on data showing hedge funds fleeing the market and said more are set to exit when their algorithms are triggered by rising volatility…

“At this point, we think it would be a mistake to dismiss the possibility of a Lehman-like shock as a mere tail risk,” Nomura macro and quant strategist Masanari Takada said in a note on Tuesday. “The pattern in US 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.”

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