JPMorgan’s Kolanovic Sees Stock Rout Overdone, Urges Dip Buying

(Bloomberg) -- The S&P 500’s worst drop in six months on Monday is an opportunity to buy stocks as the global economic recovery is poised to pick up momentum, according to JPMorgan Chase & Co. strategists led by Marko Kolanovic. 

“The market sell-off that escalated overnight we believe is primarily driven by technical selling flows (CTAs and option hedgers) in an environment of poor liquidity, and overreaction of discretionary traders to perceived risks,” the strategists wrote in a client note. “Our fundamental thesis remains unchanged, and we see the sell-off as an opportunity to buy the dip.” 

Stocks sold off Monday as angst grew over China’s real-estate sector and Federal Reserve tapering. The S&P 500 dropped as much as 2.5% for the biggest decline since March, extending its loss from a Sept. 2 peak to almost 5%.

As the benchmark undercut its 50-day average for a second day in a row, failing to rebound from a reliable support that had been in place for the whole year, computer-driven traders like commodity trading advisers, or CTAs, stepped up selling. Volatility-targeted funds that allocate assets depending on price swings may be forced to sell as much as $40 billion of assets, warned Nomura Securities strategist Charlie McElligott. 

Kolanovic reiterated the firm’s bullish stance on equities, noting the team last week upgraded the S&P 500’s year-end target by 100 points to 4,700 amid a subsiding wave of delta virus cases and better-than-expected earnings.

“Risks are well-flagged and priced in, with stock multiples back at post-pandemic lows for many reopening/recovery exposures,” the strategists wrote. “We look for cyclicals to resume leadership as delta inflects.” 

The upbeat view contrasts with Morgan Stanley’s Mike Wilson, whose worst case called for the S&P 500 to plunge more than 20% from its peak, a scenario that the strategist says looks more possible.

Read more: Almost $50 Billion of Dip-Buying Inflows at Risk in Stocks (1)

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