JPM’s Kolanovic: “A Split Congress Is The Best Outcome For Markets”

Wednesday, November 7, 2018
By Paul Martin

by Tyler Durden
Wed, 11/07/2018

One week ago, amid a duel of forecasts between Morgan Stanley “rolling bear markets” thesis, JPMorgan’s head quant Marko Kolanovic tripled down on his bullish outlook, when he cautioned that “many investors are positioned for a ‘rolling bear market’ and are exposed to the risk of a ‘rolling short squeeze’ into year-end.”

He also predicted that after the US market sell-off and slowdown in China, “progress on the trade war is more, rather than less, likely.” And echoing the sentiment presented by Nomura’s Charlie McElligott, who earlier today anticipated today’s market melt up as levered funds chase indices into year end, Kolanovic said that with global Hedge Funds down ~4.5% and the market up ~2% YTD, missing the past week’s ~5% rally would have made a big difference, especially as their shorts moved more than longs.

In retrospect, and 6% higher from the October 30 lows, Kolanovic was right, and after solid gains over the past several days, the JPM strategist says that “the question is what should investors do next?”

Perhaps not surprisingly, Kolanovic remains bullish and thinks that the market will move higher into the year-end, as “investors may have to participate on the upside (appropriate exposures may be high-beta indices such as Russell 2000 and MSCI Emerging Markets)” especially in the context of McElligott’s source of “short gamma” which is pushing the market ever higher the more stocks rise. Furthermore, Kolanovic notes several factors that improved since last week “that keep our upside view intact.” He lists the following:

November is shaping up to be the strongest buyback month on record (based MTD activity observed by the JPM desk).
Short convexity of market makers is rapidly declining and may turn long. This should be positive as it will bring back intraday reversion as opposed to momentum. This reduces realized volatility, and many investors will misconstrue this as a return of the ‘buy the dip’ environment.
Realized volatility is expected to decline. Systematic investors (such as vol targeters) will start rebuilding positions into year-end. This may not be a main driver, but could add ~$1bn of inflows per trading day into year-end.
Implied volatility has declined, with the VIX term structure reverting to contango. For some strategies this is a positive signal.
Next week, 1M price momentum will turn positive for most equity indices globally (1M ‘anniversary’ of the crash), and may lead to CTA inflows or short covering.
Elections have passed, and it removed the tail risks of a blue wave (impeachment, repeal of tax reform, etc.). This should be positive for sentiment.
Split congresses have historically been positive for the market, and this time it reduces the probability of the most negative trade war outcomes.
The US earnings season turned out to be one of the strongest in a decade: 98th percentile on bottom line, 97th percentile on top line, above average on guidance/revisions

The Rest…HERE

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