The slight downturn in the major indices hasn’t deterred JP Morgan and their wildly bullish stance.  They still like the reflation trade, short duration bonds, and a U.S. dollar short.  Personally, I believe the dollar has seen its 2009 low, but only time will tell.  It’s hard to turn full blown bearish on equities heading into a new earnings season that is likely to be “better than expected”.  JP Morgan’s full strategy update:

  • Portfolio strategy: Stay in recovery and asset reflation trades.
  • Fixed Income: Stay short duration.
  • Equities: Inflows into equity funds should start accelerating in coming months as bond yields are at historic lows.
  • Credit: Stay overweight super senior AAA CMBS and consumer and mortgage-related ABS, as investors reach further for yield.
  • FX: Stay short USD on FX reserve diversification. Add to sterling shorts.

One of the primary drivers of their bullishness is the global overweight position in cash and bonds.  JP Morgan believes investors will be forced into more risky allocations as cash and bonds prove to be insufficient returns on investment:

The recovery and asset reflation trade continue to work in tandem to push up asset prices across the world. Equities hit new highs this week, while credit spreads and the dollar fell to new lows. Bonds are in a range despite massive supply. We stay with both of these trades, keeping us long equities and credit, long carry, short the dollar, and positioning for range trading on bonds and commodities.  Neither positions nor value are as yet threatening. We estimate the world remains long cash and bonds. Cash is likely the most expensive asset in the world. And fixed income is now near all-time lows. Hence, we expect to see further flows from cash and low-yielding bonds into credit and equities.

The banks are bullish and appear to be controlling much of the market action.  Ignore them at your own cost….


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • Rob

    Could the reflation trade be setting the market up for an even bigger crash sometime in the future, probably not this year, but sometime in the next 1-4 years? Stay out at your risk, but stay fully invested at great risk as well.

  • jt26

    Rob has hit the investors dilemma on the head. The related dilemma is, do I trade with the Fed again, or will this time, they finally lose their magic or politics says enough is enough?

  • Brian

    The only thing that gives these bozos, and their forecast of higher US crony-captial markets, a shred of credibility (remember these companies would be DOA if not for the taxpayer)is their close relationship with the government. That’s it! That goes for Goldman too.

  • AWF

    This is Trading strategy

    NOT an Investing Strategy

    That means YOU better be as QUICK when JPMorgan decides is time to sell.

  • Aki_Izayoi

    Bonds seem “overbought” temporarily (or even in the long term) and it might be a nice trade to consider a short-term short position since Treasuries are near the 330 bps resistance and the herd of bond traders are bearish on the economy. I am stil bullish on bonds in the long term.

    Stocks seem to have more room to go given that investors haven’t put allocated much to equities only 44% with a twelve year average of 51%. I’d look for 47-48% to more confident if I would use that as a timing indicator. Also, a P/E of 18 can be justify if one assets mild deflation with little defaults, and no deflationary spirial. Low interest rates can justify a P/E of 18 if one assumes no downward deflationary spiral. Earnings season might term into a gap and crap so traders must be nimble if they are long.

    I still love long dollar though. Long dollar vs. Sterling, Euro, and Aussie.