JPM: CORRECTION COMING, BUT WILL BE SHORT-LIVED
Few of the big banks have traded the recovery as well as JP Morgan. They nailed the reflation trade and they have subsequently been dead right about the reflation trade transforming into the recovery trade. They’ve recommended that investors pile into the highest risk names in the market and its been a winning trade since. In their latest strategy note they say the recovery trade is well intact over the long-term, but could hit a near-term snag. Their strategists believe the market is susceptible to a near-term dip as investors become overly bullish and stocks get overbought:
“The global rally gathered pace last week as equities and credit reached new cycle highs, while bonds and currencies stayed in a broad range. The almost straight-line nature of the rally over the past nine weeks and various signs of excess froth in the risk markets suggest that the probability of a profit-taking correction has risen significantly. We accept this risk, but plan to ride through any correction, as the underlying profit and value drivers of the rally are in our minds strong enough to prevent serious damage.”
In terms of the Goldman Sachs investigation they see little reason for the contagion to spill over into the rest of the market. The near-term uncertainty could take stocks as low as 1175 on the S&P, but stocks are unlikely to fall much further:
“Although the SEC fraud case does not have direct implications outside Financials, the rise in uncertainty is negative for equities at a time when equity markets are overbought. Technicals have been pointing to overbought equity markets for some time now and Friday’s correction has the potential to drag the S&P 500 down toward 1175 in the near term. But our technical strategists see very little chance of the S&P 500 falling below 1150, i.e., the January high, over the coming weeks.”
All in all, this is no reason to get too fearful or overreact to negative news. The fundamental picture remains quite strong and Q1 earnings should continue to reassure investors that a profit recovery is well in place:
“However, we believe that any correction should be short-lived. The fundamental picture is strong for equities and the news from the 1Q reporting season has been very supportive so far. The 81% of the S&P 500 companies that have reported so far outperformed on revenues and 79% on EPS. Investors are not fully appreciating how strong and broad this earnings cycle is proving to be. 30% of the companies in the S&P 500 are forecast to exceed their prior peak EPS and the top quartile of S&P 500 companies should see EPS collectively 28% above their prior peak.”
Source: JPM
I pretty much agree with JPM here. This won’t be the next big leg down all the bears are hoping for. I think this whole GS lawsuit completely over-hyped and ultimately, ineffectual. I think we’re seeing a fabricated anti-Wall Street campaign from the White House in order to shore up the Democrats’ dismal approval ratings for the fall election season. Obama has once again shown no leadership in meaningful reform, he still has the same corrupt cadre of advisers he had when he first came to office. No reason to suspect anything is different this time around.
“However, we believe that any correction should be short-lived”
Well, I guess that will be up to the Fed and how they want to play it. What ever happened to the Fed Audit being pursued for some time? To take our attention away from all the current financial industry scandals Obama will declare UFOs to be real!
Everyone beat earnings this morning (again) and futures are acting like this is some huge surprise. What gives? Who is buying this news? We have known strong earnings were coming for weeks now.
I’m not sure how long this can go on. Talking to a banker friend here in the Raleigh/Durham area – he indicated that they cannot find qualified borrowers (small business owners) – yesterday’s collateral (inventory and acct recv) rules no longer apply.
The small business engine is suffering – sales, profits are struggling – housing and commercial building is non-existent.
I didn’t realize that standards for corrections are now less than a 3% decline. So down big one day and get it out of the way?
The trend is your friend people. Everyone keeps trying to fight this tape. That strategy doesn’t work in a bull market.
Anyone know why the market is up today? Yahoo Finance says earnings, but all of the companies that reported earnings today are trading lower (JNJ, KO, IBM, GS). What’s going on?
Stocks now up 11 of the last 13 sessions. These streaks are just amazing.
Didn’t everyone read the WhiteHouse Press Release something about Obama’s Financial Reform Package which uses Presidential authority to outlaw any negative stock movement. All stocks must go up all the time or he will send his “We Are Going MOON Czar” after you.