J.P. Morgan' s Kolanovic says we're in a bear market, so buy the dip

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It isn't just a stock market correction, it's a bear market, but fears of the Fed are overdone and investors still have opportunities to buy in, according to J.P. Morgan.

Strategist Marko Kolanovic, who has recommended buying the dip through at previous pandemic-era selloffs, says without a recession in sight, stocks - especially small-caps (NYSEARCA:IWM) and cyclicals (NYSEARCA:XLI) (NYSEARCA:XLE) (NYSEARCA:XLF) (NYSEARCA:XLB) (NYSEARCA:XLY) - offer buying opportunities.

"Stocks are in bear market territory and erased their post-pandemic re-rating, small cap valuations are at 20Y lows, and investor sentiment is bearish," Kolanovic wrote in a note. "Many market metrics such as recent performance of high vs. low beta stocks and valuations of small caps are already fully pricing in a recession - something we do not see materializing."

"On the valuation side, S&P 500 (NYSEARCA:SPY) post-pandemic re-rating has almost been completely erased with PE now only 0.5x higher vs. pre-pandemic level when rates were more restrictive and fundamentals were less supportive," he said. "Even more extreme, small caps have seen their valuation compress to levels last seen ~20 years ago."

Last week Kolanovic said the bearishness in the market was overdone.

"While jitters around a Fed hiking cycle are understandable, this has been magnified by technical factors that can change quickly - i.e., we could see a reversal of systematic outflows, pickup in buyback activity as we exit blackout windows, and magnification of flows by weak liquidity and short-gamma hedgers," he added.

As long as the "S&P 500 (SPY) remains below ~4600, gamma is negative with dealers buying on strength and selling on weakness. This would amplify market moves, especially in the current low market liquidity/depth environment."

Goldman Sachs recently screened for the best and worst stocks for tightening conditions.

Comments

[Diesel]

Indices are still in bull market but easily half of stocks might be in or on the brink of bear market. In Nasdaq, 3/4 of stocks are in bear territory.

[HJ2255]

Of course they want someone to "buy the dip", that's how they make money. The more you buy, the more you'll eventually sell, pile on the revenues for them.
Nah, I'm over 20% cash and will let everyone chase the dip. I kept my value stocks, oil, ibonds, quality growth names; but I'm not adding much here. After 20 years in the market you eventually catch on to the games the cons play....and the game is certainly on. My advice is change your asset allocation to something that allows you to take a hit well.

[obiwan48]

The forecasted 4-5 interest rate increases ( total say 1.5%) over the next 12-15 months will not be enough to put the inflation genie back in the bottle. In my view, we’ll be seeing 8-12 rate increases over the next
3 years.
Although there are a number of compelling buys in specific companies,
the real risk is another hard leg down in several sectors market as
rate increases grind away in coming Quarters.

Counterintuitively, members of the FED may actually be thinking or feeling that they are in fact relieved that ( particularly the high growth sector took a hit) because of the amount of intense speculative froth and valuations that had built.
For sure, the FED now has the attention of the market.
I believe the FED is not going to dial back or be able to pause for long the projected interest rate increases.
Simply, there will be more interest rates and for a longer period of time
than most folks think.
Nothing new…has happened for decades upon decades.

What has been amazing to me, is the extraordinarily long time period
we had record low interest rates. Just unbelievable.
When you think back, we had the dot.com ( high growth) crash
between 1999-2002, The 2008-2009 Great Recession Crash,
Then followed by another hard correction in 2011-12 ( PIIGS Sovereign
debt crisis), then the Pandemic Crash in 2020, that’s 4 stock market crashes in the past roughly 20 years alone.
I’ve been an investor/ trader since the late 60’s. Was a professional
in the commodities world ( market maker side) for 40+ years as well.
Bottom line, 4 crashes in 20 years?
Hmmmm…

Current Inflationary pressures are far more dangerous ( both economically and politically) than a stock market staying abnormally high just because “ it’s the stock market”.
The FED simply waited too long to start rate hikes.

I feel we’re in a cycle of lower lows and lower highs for numerous stocks. We’re still in the fairly early innings of the overall macroeconomic change in the cycle as well.

Certainly, for buy and hold folks, they’ll stay the course, however,
we could be down another (easily) another 10% ( and much more for the majority of stocks) by year end.

Long energy, health care, financials, some defensives, precious metals,
couple of high growth names. 90% of all positions have OTM covered calls written on them

[kata]

@obiwan48

We know from Volker and past history that once you get wage/push started there is no resetting of inflationary pressures without a recession. So, there you go. The Fed has no choice, it won't do much until it does much. And it will hurt.

[Doctor E]

Market is down 8.5% from highs.

I thought a bear market was 20%.

Somebody needs to send these guys back to school for some refresher training.

[TimedTrader]

The entry of new retail investors/traders/speculators, born two days ago have added froth to the market.. Now, P/E of 200 is still cheap, and so is bitcoin at $100k.

The reality is that the new generation has stopped going to work (look at UK) and instead directly trading markets. If everyone stops working and start making money trading bitcoins, NFTs etc, who is going to deliver goods, etc? That's what supply chain disruption is in a nutshell.. The really picture of economy shall be clear sooner than later, so will be the true value of the market.

[Entreri]

The fear is excellent, this creates great buying opportunities for long term investors.

There isn’t anything remotely close to US tech companies in terms of $ and innovations. There is no better country to invest than the US.

[PauloCostaSilva]

Companies with revenues soaring, more cash in hand than ever before ... yet, some folks find it strange those stocks are higher than they were before the pandemic.
Is this how some people view the stock market ? If companies shoot up north they are immediately overvalued ? Do people even realize where we stand social-economically ? The fallacy that every company should be trading below $100ps is getting crazier by the day.
Do you guys want $AAPL trading like 2018 with the numbers from their last earnings report ? Good grief ...

[AlphaMove]

One of the most undervalued sectors, valued at or below cash, at historic discount, is biotech. Buy the XBI for big returns in 2022-23.

[Loi4star]

@AlphaMove What do you think about Moderna?

[AlphaMove]

@Loi4star Unfortunately MRNA was hyped along all other Covid plays, thus it seems to me fairly or even richly valued around 170-200. The main risk is the fade of Covid over the time and dropping revenues.

[cmedco]

@AlphaMove I am debating over going with XBI or XLB. They both show growth coming with improvements in employment and supply in 2022. What is your take?

[Harsh Truth]

Fundamentals haven't changed, recent rally is traders driven not investors driven. The charts are showing that index values are going up but the overall trading volume is going down, this rally is not sustainable.

[craftbrewinfo]

Well if Kolanovic says it, it must be so! (Whoever he is)

[well]

@craftbrewinfo yes please buy some stocks - his portfolio must be under water and he needs to break even.

[Clairvoyant Investor]

5 rate hikes are now fully priced in.This correction pulled back the S/P and Nasdaq about 15% which is the average max trough in corrections over the last 100 years. We might retest our recent lows but you can't bet in a scared manner from this point moving forward. The worst is behind us. Even if markets go lower from here, this is still an attractive entry point after a solid 10% correction. My outlook brightened over the weekend when I finally accepted the reality that the market was not going to bleed lower indefinitely. Corporate earnings are solid and that should put a floor under equities unless Russia invades Ukraine. Much more bullish now that a solid pullback has become a reality. 😇

[User 50223786]

@Clairvoyant Investor ....until Russia invades Ukraine

[PauloCostaSilva]

@wakagirlx They won't ...

[bet727]

@wakagirlx Putin is smarter than you think. No invasion.

[Maverick 2021]

Everything is wonderful again, buy the dips ….!

Jim Cramer gives the all clear signal, as market logs huge rally …!

What could go wrong ?

[craftbrewinfo]

@Maverick 2021 a transfer from the have nots to the haves ;-)

[Tulip hoard]

Mark seriously? We're already going into one now M2 has collapsed with high CPI/demand destruction, however if the feds want to go tits up UBI.with 2 bands a month per trader fine I'm in🥴 At 35 percent cash good to go until the FOMC backs off👍

[iv2006]

Small caps are historically cheap compared to the large caps. There are two obvious ways to resolve this: either small caps going up or large caps going down.
Marko Kolanovic (JPM) recommends making bet on the first, Mike Wilson (MS) - on the second.

[MRD27]

@iv2006 Mike Wilson has been very consistently wrong

[seagulljonathan]

@iv2006 Or both going down hard to zero.

[Shamanski]

Growth is booming.
EPS growth is booming
GDP is booming
FWD Guidance is booming
Corporations are better and stronger than ever.

Stocks are very undervalued right now and have a lot of gains coming in 2022 and 2023.

[Idkmuch]

@Shamanski undervalued ? Lol energy is only place you can find reasonable valuations , everything else is at dumb multiples

[Winnertakesall]

More click bait... every day you can find a bull and a bear with an article. My personal opinion is we're still watching a correction play out and a huge rotation into value stocks. This will go on for at least 3-5 years or maybe longer.

[Tulip hoard]

@Winnertakesall 3-5 years with the child like attention span of this market more like months lower highs coming !

[Archman Investor]

"Strategist"..... Marko Kolanovic

Good grief.

[capital777]

@Archman Investor exactly!!!🙄

[MoonRiver69]

Still got those Bubble Blinders on?

[kata]

Isn't the SPY down 6ish % from the top? That's no bear. Not even a decent pullback.

[well]

@kata agreed......theres no more free lunch and fair value is still probably 40% off from here ... market is still bloated from all that liquidity

[Plaubel]

Sell the dip buy the rip is a bull market thing. Am I missing something?