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Before the panic sell-off at the opening of the U.S. stock market on Monday, Andrew Tyler, head of U.S. market information at JPMorgan Chase's trading department, issued a report warning: Don't buy at the bottom. Tyler pointed out that the recent market trend may be a bit excessive, and the actual economic situation is stronger than the trend of risky assets, but it is not wise to try to fight this market inertia. Investors can consider turning to tactical market neutrality or tend to net short.
Tyler wrote in the report that as we think about the stock market in the coming weeks/months, he thinks it’s worth first looking at the comments from JPMorgan’s Chief Global Market Strategist Dubravko Lakos-Bujas and Head of Global Equity High Touch Trading Elan Luger.
Lakos-Bujas said that it is recommended to diversify investments and avoid momentum tail risks by increasing allocations to anti-momentum defensive value stocks, namely utilities, consumer staples, healthcare, telecommunications sectors and high dividend stocks, and stay away from procyclical risks, namely industrials, non-essential consumer goods, financial sectors and unprofitable small-cap stocks. At the same time, he pointed out that his stock forecast outlook does not take into account tail events, although there are many events that could be catalysts for rising volatility, rapid deleveraging and a sharp collapse of global markets, such as interest rate and foreign exchange risks, global liquidity tightening, elections and geopolitical risks due to the unsynchronized inflation and growth cycles in countries such as the United States and Japan.
Luger said,

• On the interest rate front, the global interest rate situation is extremely tricky right now. Previously, if the Fed cut rates, the market would panic, and the Fed did not cut rates, and now it is "behind". Lower interest rates are good for small-cap stocks, but a recession is definitely not good. At the same time, Japan is entering a rate hike cycle. Volatility and funding rates are soaring, leading to large-scale liquidations. The hawkish stance of the Bank of Japan is a prelude to the dovish stance of the Fed's risk focus on the labor market, which has made people's concerns about a recession a focus.
• In the US election, Harris, who became the Democratic presidential candidate, has a significant lead over Trump in just a few days. The campaign between the two will be very intense, which means that investors can neither trade Trump nor Harris. As the election approaches, the market needs to price in the tail risk of the Democratic Party's victory, which is not very market-friendly. Luger said that looking at the election data since 1996, it was found that the only trade that can work consistently during the election is negative momentum trading. That is, sell the winners and buy the losers-reduce risk.
• On the geopolitical front, the situation in the Middle East is clearly deteriorating rapidly, which does not help risk appetite.

In summary, Luger believes that this is one of the most complex backgrounds before the election in some time. It is almost impossible to have confidence in the position, which will give investors more reasons to reduce risk. Although he is not extremely pessimistic, he does expect that the S&P 500 index may correct a few more percentage points, the volatility of US stocks should remain high, and the fluctuations in various sectors will be very violent.
Tyler said in the report that he agreed with the views of the above two colleagues because the market has quickly turned to the narrative of growth panic/recession. Therefore, he made the warning at the beginning of this article that it is not wise to fight against market inertia, and suggested that investors who have not yet taken action should consider turning to tactical market neutral or tend to net short.
In the US market, Tyler expects that the Fed's rate cuts will ease economic pressures and should see consumer rates move back lower before the first actual rate cut. The market is focused on the Fed's policy mistakes and the possibility that the weakness in the labor market will push the non-farm payrolls data into negative growth. Although he believes that the economy still has a chance to achieve a soft landing, the market may have shifted to "show" a soft landing now and is unlikely to ignore what he sees as periods of weakness, especially during seasonal weakness. Until then, a defensive stance seems to be the wisest.
Tyler mentioned that the past data compiled by his JPMorgan colleague Craig Cohen reminded everyone that the average drawdown in any year is 14%, but in the years when the S&P index closed at 10% or more, the average drawdown was 11%. This phenomenon has been confirmed in media reports last Friday. In addition, the Russell 2000 index has fallen 3% for 17 consecutive days, and the average return is expected to exceed 40% in a year, with a probability of 100% year-on-year growth. However, this may be a bumpy journey, as the index was still lower in October 2008 and six months after February 2020.

Tyler wrote that combining Cohen's data with the possibility of positive but lower-than-expected growth trends in the U.S. economy, support from the Federal Reserve, and continued surprising upward earnings would predict that U.S. stocks may see a year-end rebound starting in late September/early October.

As for this month, Tyler believes that there are still many catalysts in August, but only if all of them play a bullish role can the current stock market trend be reversed and return to all-time highs. Otherwise, investors may want to use these events in a very tactical way, or use any rebound to find better entry points for bearishness until the market finds a level. Recent conversations between JPMorgan and clients show that the S&P point range that investors want to buy back in is 5200 to 5250, and this round of selling may still have some way to go. The key is that investors' positions have not yet suggested that it is time to buy on dips