Why JPMorgan Chase & Co. Still Hates The Market Rally

bearbull1Tyler Durden:   In the past month, not a day has passed without some major sell-side firm (yes, that also now includes traditional bull Goldman Sachs) releasing its bearish take on deteriorating fundamentals, and urging clients to not only not buy the rally but sell into it (and as both retail and “smart money” flows indicate, this advice ha been heeded).

Today it’s JPM’s turn.

In the latest note is out of JPM’s Mislav Matejka, the equity strategist presents five reasons why “upside for stocks is limited” due to numerous reasons but mostly because “global activity momentum is failing to pick up.”

Here are his five reasons not to chase the rally in the short-term:

Equities have seen very large outflows for a number of weeks now, vs bonds which have enjoyed significant inflows.

This could be interpreted as a positive, as one could say that equities appear under-owned, vs bonds which might be over-owned. US EPS revisions have managed to stay in positive territory for the last 3 weeks.

Given these and the fact that stocks have been consolidating the Feb/March gains for two months now, the question is should one look for another leg higher, such as the 10-15% tradeable rally we called for on 15th Feb?

Our view is that risk-reward is not attractive for equities, as:

  1. Activity remains sluggish. The latest business expectations reading within US services PMI is the lowest on record. The latest output reading within US manufacturing PMI is the weakest since Sep ‘09. The gap between CESI and SPX continues to be significant.
  2. Chinese backdrop remains worrying. Activity rolled over again, iron ore price is down 30% from highs, A-shares are down double digit ytd, policy support is waning and Renminbi is very close to making new lows vs the USD.
  3. US EPS revisions will not likely be in positive territory for long. The hurdle rate for the rest of ’16 is very optimistic – S&P500 EPS are expected by consensus to accelerate from $27 in Q1 to $32 in Q4, which would be a new all-time high. Even using these lofty consensus EPS projections, P/E multiple for S&P500 is at the top of the range, at 17.8x for ’16e, not offering much upside.
  4. Bond yields are staying put. We need these to move up for equities to perform, in our view. Furthermore, the move has to be for the right reasons, i.e. growth turning up, and not just inflation. Yield curve is the flattest in eight years, which was typically not a good sign.
  5. Tactical indicators are mixed. Retail outflows suggest positioning is light, but HF beta is in fact elevated, and speculators are net long SPX futures. Seasonals are not attractive and some of the upcoming event risks might end up being more of a problem than the equity market gives them credit for currently. VIX trading near lows is perhaps a sign of complacency.

In terms of equity allocation, we are UW equities in balanced portfolios for ’16, our first UW equity allocation since 2007. We cut our multi-year, structural OW stance on 30th Nov and this year have a preference for credit vs equities.

It’s not just the near-term. JPM also adds that over the medium term “we think the upside for equities is limited, and we advise to keep using rallies as opportunities to reduce.”

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