JPMorgan’s head quant warns of ‘marcro-momentum bubble’ – FINANCIAL
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JPMorgan’s head quant warns of ‘marcro-momentum bubble’

A JPMorgan derivatives strategist has an explanation for what's happening in the current market.

Marko Kolanovic, the derivatives strategist at JPMorgan Chase & Co., made all of the right calls when markets went haywire last August. Now he’s back with an explanation for what’s happening in the present market and it’s a doozy.

In short, Kolanovic is predicting what he calls the “macro-momentum bubble,” that has seen money pour into the U.S. dollar and developed market stocks and out of higher-risk emerging markets and commodities, is about to stage an impressive reversal.

“Every asset trend begins with fundamental developments,” he said inside a note to clients. “As the U..S was the first to get free from the worldwide financial crises of 2008-2011 (with Europe and Asia lagging), U.S. assets like the S&P 500 and USD started outperforming international assets. Divergence between Central Bank policies triggered the USD rally, cross-regional capital flows, and set pressure on EM economies, Commodity prices and Commodity related Developed Market Equity sectors.”

Kolanovic notes that the flows from the latter assets created what he calls an “unprecedented divergence” and 6 years of rallies for investors who followed the flow.

“Actually, although some assets are near their peaks of historical price and valuation levels, other medication is near their lows,” he said. “Because the last bear market Many years ago, the S&P 500 expires ~200% and still near all-time high levels. The U.S. Dollar Index (DXY) can also be at its highest point in Fifteen years (because the tech bubble). On the other hand, a large number of risky assets have been in the opposite situation: Emerging Market equities, EM Currencies, Commodities are presently trading below levels during great recession of 2008/2009.”

But all investment trends come to an end. Kolanovic’s current call has more weight than the usual normal strategist’s because he got numerous wild moves this past year correct.

So what’s his final verdict?

“We believe S&P 500 momentum turning negative this season (following a 6-year rally) may be the initial step from the mean reversion we be prepared to play out later this season,” he explained. “Mean reversion would result in the outperformance of Emerging Market stocks, Commodities, Gold, and the Energy Sector, and relative underperformance of Momentum assets for example USD, S&P 500 Low Volatility and Momentum portfolios, and likely the S&P 500 itself.”


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