- According to JPMorgan, the stock market could rise another 12% by the end of the year if technicals turn positive.
- The bank said more than $100 billion from trend followers is about to flow into stocks.
- “Trend-following strategies that have been mostly short stocks this year are covering shorts,” said JPMorgan.
According to a Thursday note from JPMorgan, the current rally in the stock market could continue through the end of the year as trend-following strategies begin to buy stocks.
The bank reiterated its S&P 500 year-end price target of 4,800, which represents upside potential of 12% from current levels, arguing that investor positioning has become too bearish and is expected to reverse.
In particular, stock positioning among systematic and discretionary funds has fallen to the 10th percentile, said JPMorgan’s Marko Kolanovic, and several positive technical indicators could quickly reverse that.
“Next [corporate] repurchases, these strategies can generate steady inflows of several billions [dollars] per day in equities for the next 2-3 months,” Kolanovic said. “Trend following strategies that have been largely short in equities this year are covering shorts.”
That short coverage translates into buying stocks, which increases demand and ultimately increases stock prices. And now the S&P 500 is poised to send out several positive technical signals that would lead to more purchases from systematic funds.
If the S&P 500 is able to recover above the 200-day moving average, which it briefly reached during Tuesday’s trading session before falling, more than $100 billion in fund flows could flow into stocks, Kolanovic said.
But to position himself for the potential advantage, he shied away from recommending investors to hunt for mega-cap tech stocks or “recession-proof” stocks trading near all-time highs.
Instead, Kolanovic highlighted opportunities in the S&P 600, a small-cap index that trades at a recessionary level, as well as in the energy sector, which still offers attractive valuation.
“We continue to believe that the 2020s will be nothing like the 2010s and that many of the investment trends – whether in commodities, technology, ESG or low-vol investing – will be turned upside down,” he concluded. .