- The stock market could surge another 12% into year-end as technicals turn positive, according to JPMorgan.
- The bank said more than $100 billion from trend followers are on the verge of pouring into stocks.
- "Trend following strategies that were largely short equities this year are covering shorts," JPMorgan said.
The current rally in the stock market can continue through the end of the year as trend-following strategies start to buy equities, according to a Thursday note from JPMorgan.
The bank reiterated its S&P 500 year-end price target of 4,800, representing 12% upside potential from current levels, arguing that positioning among investors got too bearish and is set to reverse.
Specifically, equity positioning among systematic and discretionary funds has fallen to the 10th percentile, JPMorgan's Marko Kolanovic said, and various positive technical indicators could quickly reverse that.
"Alongside [corporate] buybacks, these strategies can provide steady inflows of several billion [dollars] per day in equities for the next 2-3 months," Kolanovic said. "Trend following strategies that were largely short equities this year are covering shorts."
That short covering translates into buying stocks, helping increase demand and ultimately send stock prices higher. And now the S&P 500 is on the cusp of flashing various positive technical signals that would lead to more buying from systematic funds.
If the S&P 500 is able to recover above its 200-day moving average, which it briefly hit in Tuesday's trading session before moving lower, then upwards of $100 billion in fund flows could pour into equities, Kolanovic said.
But to position for the potential upside, he is shying away from recommending investors chase mega-cap tech stocks or "recession proof" stocks that are trading near all-time highs.
Instead, Kolanovic highlighted opportunities in the S&P 600, a small-cap index that is trading at recession-level multiples, as well as the energy sector, which still offers an attractive valuation.
"We remain of the view that the 2020s will look nothing like the 2010s, and many of the investment trends — be it in commodity, tech, ESG, or low vol investing — will be turned upside down," he concluded.