Kolanovic Asks "How Close Are We To The Market Top" And Answers

"How close are we to the market top?"

While that is and always has been the question on every trader and investor's lips, it is also what an increasingly greater number of more and more nervous JPMorgan clients wants to know, especially those who, according to JPM head quant Marko Kolanovic - want to protect strong YTD gains or chase year end performance. What sucks is being designated the person responsible with answering this question. In this case, that's person is the quant guru himself, who explains that "to assess this question we analyze equity positioning, possible signs of irrational exuberance, and again draw attention to another form of excess which we call ‘quantitative exuberance’.

Here are Kolanovic's three answers to how much higher stocks could go before hitting the bubble ceiling.



While we think that the Tax bill will be a positive catalyst that would move equities higher, there is only so much the market can rally if equity investors are already near maximal allocations. These allocations are near historical highs, not leaving much room for further increases. Numbers are shown as historical ‘percentiles’. Starting with retail investors one can notice that margin debt (measured as percentage of market capitalization) is at its highest point ever, which includes the 2000 tech bubble episode. The percentage of US household wealth in equities is in its 94th percentile and above its 2007 peak, but slightly below 2000 levels. Sovereign wealth funds and US mutual funds are also near record levels. Pension Fund allocations appear to be in the 88% percentile, although there is some uncertainty around this number in adjusting for private asset and HF holdings. Global Hedge Funds’ allocation (as measured by equity beta) are also near record highs, and Equity Hedge funds’ allocation in their 93rd percentile (since 2005).


Irrational Exuberance


Previous market tops often coincided with the phenomenon of ‘irrational exuberance’. While we argue below that this is not needed for the market to top, we look at the signs of excesses in the marketplace. One such measure is increased interest of retail investors in equities. We note a significant spike in the pace at which retail investors open online equity accounts, comparable to 2000 levels. However this level of interest only started this year, while it persisted for over 2 years going into the tech bubble burst. We also note that retail interest in speculating this time is shared between traditional assets and cryptocurrencies (as indicated by an analysis of online searches for account opening). We see this as another sign of excess and risk as the cryptocurrency market passes 1% of US GDP (not counting stocks traded for proxy exposure). The excesses in equity markets are likely related to the internet/tech, a theme shared with cryptocurrencies. For instance, we think that many tech companies deemed to be part of the ‘secular growth’ thesis are in fact part of ‘cyclical growth’ and are exposed to large downside risks in advertising revenues during the next downturn. In fact some may also be exposed to ‘secular declines’ (rather than growth) as over time products lose appeal to new generations. It is possible that post-millennial generations abandon current online environments and platforms, deeming them mentally or physically unhealthy, overly intrusive of privacy, or controlled by special interest (e.g. issue of censorship, etc.). Valuation is another topic we discussed at length in our previous work, and new anecdotes of excesses appear every day (e.g. institutional funds investing in make believe apparel for virtual online gaming characters).


Quantitative Exuberance


We also think that for the next market crisis, irrational exuberance in the ‘tech bubble’ sense is not needed. The reason is the prevalence of quantitative and passive strategies that don’t decide based on emotions, but rather based on measures such as the level of interest rates, volatility, price momentum, or bond-equity correlation. Examples of these strategies include Volatility Targeting, Low Volatility strategies, Trend Following strategies, Risk Parity strategies, Dynamical hedging strategies, Volatility selling strategies, and others. In addition, there are relative value strategies that transmit risk premia compression across asset classes and strategies. With volatility at record lows and central bank balance sheet inflows peaking this year, these strategies currently experience ‘quantitative exuberance’ that poses risk when monetary policies start normalizing in a meaningful way next year.

Hmmm, a "risk when monetary policies start normalizing in a meaningful way next year" - sounds oddly similar to Michal Hartnett's warning that in the first half of 2018 the world will observe not only the bond bubble bursting, but also a 1987-like flash crash. But don't worry, as both Macquarie's Viktor Shvets and One River's Eric Peters explained over the weekend, the financial Armageddon that is coming... is bullish. Here's Shvets:

We remain constructive on financial assets (as we have been for quite some time), not because we believe in a sustainable and private sector-led recovery but rather because we do not believe in one, and thus we do not see any viable alternatives to an ongoing financialization, which needs to be facilitated through excess liquidity, and avoiding proper price and risk discovery, and thus avoiding asset price volatilities.

... and Peters:

The extraordinary response to the global financial crisis prevented depression. But the price of salvation is proving to be as profound as it is impossible to precisely measure -- unexpected election outcomes, political paralysis, an isolationist America, de-globalization, fake news, opioid epidemics. And connecting it all, a corrosive, woven thread; injustice, unfairness, inequality, hypocrisy, distrust, endemic, growing. “We are on the cusp of great change, the old paradigm is set to shift,” he said, at altitude, the air crisp, clear.


The market has an accident, monetary policy is seen to be bust, the models have been wrong, we have to change what we do, we can’t go down the same route, we need to move to a different policy mix. Fiscal expansion, infrastructure, labor over capital. We’re moving to something that may be great for the economy, but no good for asset markets. New Regime -- end of story.


JimmyJones vesna Wed, 11/22/2017 - 14:45 Permalink

Thats about what I got from it too.  I do agree that the advertising space is way over valued and has been demonstrated to be a total farce.  People just ignore the ads and are amazingly fast at closing them before they even fully open.  The advert is annoyance more than anything and kinda makes me hate whatever product they are pushing.

In reply to by vesna

chubbyjjfong Wed, 11/22/2017 - 14:44 Permalink

Bullish then. There is no other way but up; there is no alternative I'm afraid. They will print and this thing will hyperinflate before any carsh, we all know this.

chubbyjjfong Wed, 11/22/2017 - 14:59 Permalink

The Commodity crises of 2 years ago. Remember Italian banks were gonna take this bitch down. Ebola. Portuguese banks. Spanish banks. Greece. Monte De whatsit bank. Syria did squat. Trump in the election. Brexit. French elections. Rate increases. CHAINA! Chinese platform for trading GOOOOOOOLLLLD. Mass shootings. Political scandal. Some fucking Jewish super cycle Shemitah shit. The white Dragons. Natural disasters. 12/12/2012. Mega death super massive volcanoes. H Hefner. Devasting floods and drought...... ALL DID NOTHING TO THE MARKETS.... FUCKING NOTHING!!!!!

slickrick Wed, 11/22/2017 - 15:35 Permalink

Each bubble, since they appeared, generated historic numbers of millionaires during the bubble rise. Each burst generated historic concentrations of wealth among fewer people. The top will come when only one person has all the money on earth. The rest of us will be squirrels looking for a nut.

Youri Carma Wed, 11/22/2017 - 15:35 Permalink

I think that the stock market will continue to rise trough 2018. Reason is the tax reform which will stimulate more Stock buybacks while pension funds are buying more Bonds now because of higher tax deduction this year than the next.Trump's reform will achieve is to dramatically accelerate recently slowing buybacks, which in turn will push stocks to new all time highs http://www.zerohedge.com/news/2017-11-15/moment-gary-cohn-realized-his-… Tax reform creates pension fund incentive to buy 30yr bonds NOWhttp://www.zerohedge.com/news/2017-11-21/real-reason-why-treasury-curve…

whatswhat1@yahoo.com Wed, 11/22/2017 - 15:57 Permalink

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The casino isn't the only game in town. Go long high speed lead and their respective launchers. Add a dash of gold, silver and ?coin for diversity.

CPL Wed, 11/22/2017 - 17:30 Permalink

Dearest Kolanovic,Go fuck yourself.  You are going to enjoy all the rewards you haven't shared with me until you all break like dry twigs and die irrelevant in some ditch some place as wealthy as zimbabwe billionaries.  That's all perfectly fair I think.  Remember you need to be used as the example to highlight and stress to my current pile of shit heads what happens to those that don't pay their protection money.  It's okay after this wraps up with you meat sacks, the religious people are next in line for the ass raping they wanted as they wrote in best selling books.  Remember you cunts wished for this, the fact it's going to turn out like a horribly twisted nightmare is beyond consideration.  In 2011 that decision got made for everyone and it's simply already too late to worry about it.Every point up in the markets tightens that noose around everyone's neck until they pay or die.  That's how this works Mr Kolanovic...it goes higher and higher, you all lose every penny of purchasing power and clout as the markets themselves undermine the entire foundation of all your societies.  Eventually no one will fucking care what 'business' is doing.  They'll all be as important as pocket lint and rare as broken glass in a mall parking lot.  Again...you dumb cunts wished for it and it's going to be shoveled down your throats until you 'get it' or get it.  So stop fucking whinging like pussies you aren't getting your cookie, you are getting your cookie, tonnes of them and you're all going to eat every fucking bite until you pop like balloons because it'll amuse me.DOW 23,526.18 - DOW 36,000 = 12473.82  -  BULLISH MOTHERFUCKERS!  Bullish... 

Cutter Wed, 11/22/2017 - 20:43 Permalink

Most significant comment is that "cryptocurrencies have passed 1 percent of US GDP."  The cryptomania is now getting big enough for the FED and government to worry about its systemic implications. A big factor in assessing the future of the crypto speculation.