JPMorgan's Risk-On, Strategist Who Called S&P Bounce Is Cautious
(Bloomberg) -- It’s JPMorgan Chase & Co. versus a Cantor Fitzgerald strategist who called this month’s S&P 500 bounce in the battle to predict what’s next for U.S. stocks.
On the bullish side: JPMorgan strategists including Shawn Quigg and Marko Kolanovic, who say investors should continue to position for upside in U.S. equities throughout earnings season, perhaps via the sale of S&P 500 puts to fund call spreads, or with upside bets on single stocks expected to outperform into earnings.
Cantor Fitzgerald says not so fast.
Earnings expectations are “far too high” and short-end yields will continue to rise, the firm’s Chief Market Strategist Peter Cecchini wrote in a note Wednesday, updating a call he made on April 3 that “it’s time for risk.” Since making that prediction, the S&P 500 Index gained 3.6 percent through Wednesday.
“Market participants’ tactics ought to shift as needed in more volatile markets,” Cecchini wrote. Since the S&P 500 and Russell 2000 have both reached the firm’s near-term targets of 2,700 to 2,750 and 1,580 to 1,600, “we suggest engaging in index-based risk management strategies structured to protect for a risk-off into June.”
The conflicting calls come as U.S. equity investors hunt for direction amid a market rife with mixed signals. Technical analysts are watching to see if the S&P 500 can breach a key level and continue this month’s rally. Meanwhile, money managers are the least optimistic they’ve been since 2016, reducing their allocation to stocks to an 18-month low, according to a Bank of America Merrill Lynch survey.
Cecchini points to the partial normalization of equity volatility and early signs of dispersion among sectors as indications that stocks may have reached a top. He also sees the selloff in technology shares and their “failure to recover more decisively” as concerning.
While JPMorgan recommends trades to benefit from “continued small-cap outperformance and take advantage of the volatility dislocation,” that’s exactly where Cantor says to hedge. Cecchini recommends buying May put spreads on the iShares Russell 2000 ETF (ticker IWM) to benefit “from the retreat in index volatility and the return of index skew.”
For JPMorgan, volatility is something to watch, as well.
“A larger than normal risk premium is justified again given the recent elevated market volatility and uncertainty on the impact of the new tax law,” Quigg and the other strategists wrote in a Thursday note. “We would thus advise a general bias toward being long volatility on single names into reporting.”
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