"The Pain Trade Is Higher" - Kolanovic Quadruples Down On Bullish

Say what you will about JPMorgan's quant "Gandalf" Marko Kolanovic, he sure is persistent in his bullishness.

Having declared an all clear for stock three times in a row (first on October 12, following the systematic puke, then one week later on Oct. 19, and finally one again on Oct. 30 when stocks hit their recent lows), and for good measure, once more after the midterm elections when he said that a split congress was the best outcome for markets just before stocks tumbled once more and wiped out the entire post midterm gain in one session (just when Gartman said to short stocks), the JPM Quant is back again, quadrupling-down on his bullish outlook, with what is his fourth note in one month urging JPM clients to buy stocks because - in his view - two key market risks, trade war and aggressive Fed tightening, have effectively dissipated.

In his latest note released moments ago, Kolanovic writes that in line with his previous research, "we think that equity market sentiment is held back by two key risks: the Fed hiking beyond the neutral rate and escalation of global trade war."

But perhaps no more, because as he explains, or rather infers, "today there are significant positive developments on both of these market risks. Fed vice chairman Richard Clarida indicated that the Fed may stop at the neutral rate (rather than continue hiking beyond the neutral rate), which might be interpreted as an effective “rate cut."

Maybe, but whereas Clarida's statement sparked a rally in 10Y yields and a dramatic plunge in the dollar which slumped to 1 week lows, stocks barely reacted. They did, however, respond to the second catalyst mentioned by the JPM quant, namely Trump's rehash of the same optimistic outlook vis-a-vis the China trade war that the US president trots out at every opportunity to deliver a soundbite, and stocks bought it, sending the Dow Jones over 200 points higher at one point, before fading much of the gain.

As Kolanovic notes, the second development that cements his bullish posture, is "Trump’s statement that he may not need to impose more China tariffs and that the “China list is pretty complete, four or five things left off” (from the original list of 142 requests, i.e., 96% of items have been addressed)."

According to the JPM quant, "naively interpreting the likelihood of a deal by the number of items addressed would indicate a significantly increased probability of a trade deal."

Meanwhile, going back to his favorite topic, market technicals and fund positioning, Kolanovic says that "equity positioning of systematic strategies (volatility targeting, CTA/Risk Parity) as well as net exposure of Hedge Funds remain very low (0-10th percentile)", implying that any residual selling pressure to sell from quants is non-existent.

To the JPM strategist, "this, along with record levels of Q4 buyback activity, suggests the pain trade, and therefore most likely outcome, will be the market going higher into year-end."

Will Kolanovic's latest attempt to bottom-tick the market be successful, or will human and algo traders again fade his bullish reco, instead crowning Gartman the winner in this bizarre tactical standoff, we'll know in exactly 45 days. That said, coming on the same day when Bloomberg has an article titled "‘Get Me Out’: Investors Sour on Market Strewn by Tape Bombs" and which carries quotes such as the following:

  • "Everywhere you look, something’s blowing up"
  • "Just about anything can create panic, create contagion, and it doesn’t have to be something that makes sense."
  • "People are saying, ‘Get me out across the board.' Everyone is anxious. I am anxious. You buy a good company and hope for the best and pray it doesn’t get destroyed."
  • "When this thing finally finds a bottom, panic will be everywhere."

... we may now be beyond the point where technicals, or Trump's daily trade optimism, or even the Fed's controversial dovishness matters, and instead traders will look to sell every rally now that buy the dip...

... no longer works, and behavioral triggers are far more important for stocks than fundamentals, technicals or even the best central bank intentions.