Kolanovic (a.k.a. “JP Merlin”) Sees 5% Stock Selloff

You might be familiar with JPMorgan’s quant wizard Marko Kolanovic or, as I like to call him, “JPMerlin.”

Kolanovic rose to fame a couple of years ago on the back of some ostensibly prescient calls revolving (primarily) around rebalancing flows.

In other words, he’s known for analyzing flows from systematic strats (you know, like risk parity, CTAs, and vol. targeting).

Well, hang on to your seats because he’s looked into his crystal ball and seen a 5% pullback for the broad market.

Via Bloomberg

With market showing signs of complacency and fund managers having raised equity exposure, the risk is rising for the S&P 500 to have a pullback, JPMorgan’s quantitative strategist Marko Kolanovic writes in a note.

  • Says likely downside scenario would be a short-lived ~5% pullback on the back of a hawkish Fed and de-leveraging of systematic investors during the first half
  • An upside surprise would be a powerful combination of a dovish Fed, fiscal reforms and pro-growth policies that could result in the market surpassing JPM’s target (2400 for 2017)
  • Equity exposure of various systematic strategies quite high as a result of positive price momentum and record-low levels of volatility for bond-equity portfolios.
  • Mutual fund cash balances are near cycle lows, and the beta of equity long-short hedge funds is in its 95th percentile (all hedge funds beta is in its 98th percentile).
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