As trade tremors reverberate, a bullish stock mantra just got trashed by JPMorgan Chase & Co.
Retail money, hedge funds and quants have ramped up exposures to equities with echoes of last year’s peak -- raising the risk fund managers of all stripes will beat a retreat as volatility awakens, according to strategists at the U.S. bank.
Their warning bucks the recent refrain on Wall Street that light investor positioning has the potential to cap this intensifying sell-off.
“A previous important support for equity markets at the end of last year is now becoming a headwind,” strategists led by Nikolaos Panigirtzoglou wrote in a note. “The equity market rises over the previous four months have made real money investors overweight in equities again, likely reducing the appetite by these investors to actively buy equities from here.”
Obsession with the ebb and flow of liquidity is gaining a new urgency after the S&P 500 posted its worst week of 2019 and as trade tension between the U.S. and China appears to be escalating. Stock futures are pointing to another sharp drop in Monday trading as assets sensitive to global commerce take a hit, from soft commodities to emerging markets.
While the likes of Barclays Plc and Credit Suisse Group AG have dubbed 2019 an unloved rally on the heels of outflows and signs of muted exposures, Panigirtzoglou and team have a different read.
Take the simple math of portfolio balancing. While mom and pop may have sold stocks this year, market gains alone have pushed them more overweight. In fact, JPMorgan estimates retail funds entered this month the most exposed since the end of the third quarter last year -- on the eve of the market bloodbath.
Signals flashed by hedge funds with daily reporting may also have created a misplaced impression that the fast money has snubbed the bubbling melt-up, the strategists reckon.
While estimated exposures from this investor type to the broad market has risen by a modest clip, equity long-short funds with monthly reporting tell a different story. According to Hedge Fund Research, this cohort is up almost 10 percent in the first four months of the year -- suggesting an overweight stance.
Another player to watch is trend followers, known as commodity trading advisers. They were a driving force behind last week’s rout, as bearish signals on equity momentum spurred this variety of quant to offload and add shorts, according to JPMorgan.