JPMorgan Traders Close Highly Profitable 'Tactical Bearish' Trade

Three weeks after turning "Tactically Bearish" (and 200-300 S&P points lower, depending on entry), JPMorgan's market intel desk has closed their trade and moved to a 'neutral' stance (i.e. not buying the dip) as the S&P tests the 200DMA from below...

Here is what they said:

We are closing our Tactically Bearish call and moving to Neutral.

For the balance of this week, it feels like markets squeeze higher aided by cleaner positioning.

The thinking here is that escalation is what will drive markets lower from here:

(i) attacks on energy infra especially Saudi oil production and refining;

(ii) US boots on soil or an attempt to use military force to reopen the SoH;

(iii) US / Israel targeting civilian infra in Iran;

(iv) any attacks on water supply.

Barring escalation, we expect markets to chop sideways, but it does seem more likely that we will get a decisive move shortly, either steps toward a ceasefire or another wave of escalation.

Separately, keep an eye on the US budget argument over $200bn in emergency funding as that would indicate a longer than expected conflict as that amount would fund US efforts into August, or longer.

A lack of progress on the deal over the weekend may see markets pullback but an actual agreement would trigger an ‘Everything Rally’.

That said, the long-term effects and definitive winners and losers, within US markets, may not become clear until we hear from corporate management in the earnings season kicking off in April.

As long as SoH is 'closed' (to western allies), the world remains in an energy crisis which can expand to include food industrial gases, and their derivative products.

Positioning

JPMorgan's traders think a market-neutral approach is prudent with longs in Energy and MegaCap Tech and combination of index hedges such as SPX, RTY and sector hedges such as Materials or Staples.

This is not a dramatic re-thinking of one’s book but concentrating and removing directional risk given the impact of ceasefire and ceasefire-like headlines.

That said, we are building a ‘shopping list’ of ideas that we like should a ceasefire come to fruition.

Finally, they flag the potential for re-entering gold longs.

The recent negative correlation with the USD may break as portfolios get past the more aggressive portion of de-risking. 

Professional subscribers can read the full JPMorgan Market Intel note here at our new Marketdesk.ai portal