One week ago, and just days before Kolanovic again warned - correctly - that a market slump is imminent, JPM's "other" Croat, Mislav Matejka said to "Use Any Bounces As Selling Opportunities." Any bulls who listened to him are in less pain than those who didn't. So what does Matejka think now that all indices are in correction territory and a majority of stocks are in a bear market?
The short answer: an oversold bounce is imminent. Here's why:
A number of tactical indicators we follow are suggesting the market is getting close to being oversold in the very short term. The Bull-Bear spread hit -28%, one of the lowest readings since March ’09.
Over that period, every time Bull-Bear moved to this level, equities were up on 1, 3 and 6 months.
Within the survey, the proportion of bulls fell to the lowest level since ’05.
Also, S&P500 RSI last week dipped below 30, to oversold territory.
Equities were on average up 4% over the next 1 month, on most occasions, from these levels of RSI.
Finally, Macro HF beta has moved closer to zero – suggesting that investors have de-risked.
To be sure a rebound higher to close the "gaps" is also the current case of Loic Schmid, head of asset management at Geneva Swiss Bank, who anticipates a 6-8% rebound higher, in line with JPM's expectations.
And just to make sure the pile-in is complete, here comes DB's David Bianco calling for a 5% bounce in the S&P at the same time as his credit colleagues are saying the 10Y will close the year at 1.75% (instead of 2.00% as they predicted previously):
We are not panicked by this correction because we understand it. It's driven by a profit recession centered at certain industries caused by factors that we've long flagged as risks with detailed research and quantified sensitivities. We're prepared for assessing recent developments, including the likely limits to S&P EPS damage. Our advised strategy helped to shield investors from this correction, particularly the structural revaluation of Energy & many Industrials, but this correction has overly punished other sectors and now we're ready to take advantage of it. We expect the Next 5%+ S&P price move to be up and soon. We reviewed our S&P target, EPS and valuation models and find that only a 50 point cut to our 2016 end S&P target to 2200 is warranted.
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How big does JPM believe the bounce will be: "perhaps up to half of the earlier decline could be unwound."
What happens next? As JPM itself admits: fade any initial rebound, and STFD. Here is JPM again:
The key message in our view stays to use any short term, few weeks, market stabilization as an opportunity to sell on a 6, 12 and perhaps even 24 month horizon. At end November we cut our long held structural OW on equities, and believe the regime has shifted to the bearish one for stocks.
The big picture is that we have entered the bear market – we think rallies should ultimately be sold. While oversold markets suggest a near term bounce is likely, we would recommend using any strength as a selling opportunity from a medium term perspective.
Our structural stance on equities has changed at end November. In a nutshell, we believe that the bull market is finished, and find the risk-reward for stocks not attractive anymore over a medium term horizon.
In addition, the Fed typically doesn’t start hiking after a period of worsening credit spreads, in contrast to what is happening currently.
Finally, the yield curve is flattening post the latest hike, and bonds are rallying, in contrast with past observations. We think these are ominous signals.
In our view, one doesn’t need growth weakness to materialize in order to justify a bearish equity call. Of course, if the US is slipping into a recession, and consequently profit margins are about to fall, the significant downside can be very easily imagined.
We fear though that equities could perform poorly even in the case of US growth staying resilient for longer. The continued Fed hiking will likely prop up the USD, which in turn would put additional pressure on CNY to depreciate, and on credit spreads to widen, as well as on commodities to fall => resulting in lower equities. This is what defines a worsening risk-reward for stocks.
To summarize: BTFD is dead, long live BTFD... or in this case STFR.