“We retain a firmly negative stance in equities.”

So said JPMorgan analysts led by Marko Kolanovic in an asset allocation update.

Kolanovic turned cautious late last summer. His conviction has, if anything, only hardened over the past several months.

In the latest weekly+, I noted that the spec short in US equity futures was pared aggressively in recent weeks. Assuming it was possible to take that positioning at face value in the first place, the now smaller net short could be interpreted as evidence of capitulation. That’s how JPMorgan is inclined to see it.

“The abrupt increase in US equity futures positions over the past month suggests that discretionary equity managers have capitulated,” the bank said.

“This, coupled with already elevated positioning by momentum traders such as CTAs and risk parity funds, leaves equities more vulnerable into H2, in our view,” Kolanovic, Nikolaos Panigirtzoglou and a handful of colleagues went on.

For most regular readers, this is familiar territory. Systematic cohorts added exposure as volatility drifted lower and equities trended higher. On Nomura’s estimates, for example, CTAs and vol control strats added some $130 billion+ in exposure over three months.

Notably, what was a constructive equity demand/supply outlook for 2023 “was more than exhausted in H1,” according to JPMorgan’s Panigirtzoglou, “leaving a headwind for H2.” The bank also suggested that although the corporate bid may still serve as plunge protection, that’s all it’ll be. As Panigirtzoglou put it, “net equity withdrawal by corporates slowed in Q2 following a particularly strong Q1 implying that corporates’ behavior is reverting towards becoming more of a backstop during a potential equity market correction rather than a propagator of the equity rally.”

As for the notion that the market isn’t actually euphoric outside of tech and the names most often associated with the A.I. frenzy, JPMorgan finds that narrative spurious. “The market ex-tech/A.I. is far from priced for disappointment,” the bank said, noting that the “non-tech/A.I.” portion of the S&P 500 trades at 17.4x, versus a 15.3x historical mean.

Importantly, you could easily argue that stocks should trade at a discount (not a premium) given the macro-monetary policy conjuncture. “Current market valuations need to be put in the context of higher rates than in the past 10-20 years, and meaningfully higher at the short-end,” Kolanovic remarked.

The Fed always breaks something, and although it looked briefly like the regional banking crisis was the tipping point, that episode (ironically and paradoxically) ushered in an equity rally in part due to the perception that the Fed’s efforts to stabilize the situation were proof that the policy “put” isn’t dead after all, even if the Committee keeps raising rates.

The figures above, from BofA, speak to the contention that higher short-end rates (recall that US two-year yields achieved new cycle highs last week) are everywhere and always followed by an “event.”

If SVB wasn’t this cycle’s “event,” we’re left to ask what is. Or what will be. Some say a CRE apocalypse, but that’s thoroughly socialized by now. Some would say equities, but that feels “too easy,” so to speak.

Whatever the case, Kolanovic said “FOMO is in full swing” and “complacency is being built into stocks” as traders meander through the dog days of summer. “All this suggests that, if activity momentum does weaken in H2 relative to the current projections of no/soft landing, stocks are unlikely to shrug it off, as they are not priced for disappointment anymore, even if one is to fully take out the Tech/A.I./FAANG groups from the equation,” he added.