JPM: "The Backdrop Remains The Same: Sell Rallies Toward 1950"

Yesterday we reported that following a spike in calls by the sellside to "sell the rally", hedge funds did just that and according to BofA client data, hedge funds dumped the most shares in the past week in two years.  Today, JPM's Adam Crisafulli repeats the firm's now default call for 2016, noting that "the bigger picture backdrop for the market remains the same."

Here are the three key backdrops:

  1. 16x and $120 create a firm ceiling at ~1950 and thus moves toward that level should be faded;
  2. the macro environment isn’t nearly as horrible as the mid-Jan narrative suggested but there are still plenty of headwinds;
  3. the biggest risks for the tape right now are misplaced hopes around crude (a “grand bargain” production deal isn’t imminent) and central banks (incremental easing actions going forward won’t be nearly as positive for stocks as ones in the past and actually could be counterproductive if they weigh meaningfully on banks).

As for imminent catalysts, this is what JPM sees:

Catalyst bottom line – the big ones to watch: 1) US jobs for Jan Fri 2/5; 2) Yellen testimony before the House on Feb 10 and Senate Feb 11; 3) EU Leaders Summit 2/18-19 (deal on retaining the UK in the EU is expected at this event); 4) G20 fin min/central bank meeting (2/26-27 Shanghai).

JPM is not the only one: moments ago famed technician Louise Yamada doubled down on the call, saying the primary trend for stocks is now lower as bear market unfolds; monthly momentum indicator still giving sell signal and declining; “rally may fade as fast as it appeared,” Bloomberg cites Louise Yamada's monthly note.

She adds:

  • Bear market rallies “can last long enough to lull investors into a false sense of complacency”
  • Avg. bear market lasts 17 months, suggesting this one will last until ~Oct. 2016 given market top was May 2015
  • Measured move target would suggest S&P 500 eventually dropping to ~1,600, DJIA to ~14,000

There is always one caveat... the biggest one: the Fed could adopt more stimulus such as negative interest rates, in which case “2016 will prove a challenging year and defensive positions are still warranted."

In other words, enjoy trading the "fundamentals" such as which a central banker had for breakfast.