The stock market bears were premature with their victory laps early last month amid short selling and negative feedback loops, said JP Morgan global strategist Marko Kolanovic.
The S&P 500 (SP500) (NYSEARCA: SPY) closed May, while the Nasdaq 100 (NDX) (QQQ) fell 1.7%.
“As the market moved into oversold conditions, it didn’t take much to fully reverse the losses – there were measured comments from the Fed (Bostic) and financial institution management giving the hope that a policy mistake and a recession could be avoided,” Kolanovic said. wrote in a note on Wednesday. “Corporate buyouts kicked off after earnings (and will persist for the year at a record high of $1.2 trillion annualized) and fixed-weight portfolio rebalances in the last week of the month.”
“Of course, some shorts were also forced to close, producing the strongest rally since 2020,” he said. “We think this will be a pattern for the whole year, in the sense that the market sold off in the first half and will be followed by a gradual recovery in the second half.”
“We remain positive on risky assets due to near-record positioning, bearish sentiment and our view that there will be no recession given US consumer support, the global reopening post- COVID and recovery and recovery in China.”
“This non-consensus positive view does not mean that we are advocating blind buying of broad equity markets,” he added. “Currently, there is huge dispersion in performance and valuations, and therefore opportunities for outperformance.”
“Some market segments (defensives, commodities, etc.) are trading at close to all-time relative valuations, while other market segments (e.g. innovation, Chinese ADRs, small caps , energy, biotechnology, etc.) are almost all trading at historically low relative valuations.For this reason, we believe that the most attractive investment opportunities lie in these oversold sectors that offer asymmetric upside potential .”
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