KEY POINTS
  • "At this point, we think it would be a mistake to dismiss the possibility of a Lehman-like shock as a mere tail risk," says Nomura strategist Masanari Takada.
  • Nomura's propriety sentiment data shows a "deterioration in supply demand for equities and a sharp downward break in fundamentals" among big players in the market like hedge funds.
  • The market plunge could arrive as soon as late August, Nomura predicted, as trend-following algo traders still have many bullish trades to unwind.
  • "We would add here that the second wave may well hit harder than the first, like an aftershock that eclipses the initial earthquake," the strategist said.

Investors shouldn't take much solace from Tuesday morning's rebound, says Nomura. The firm is warning the next sell-off could resemble a crisis-level plunge like the one that followed Lehman Brothers' collapse.

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.