JPM PI Weekly Wrap Aug 23

Positioning Intelligence | Weekly Wrap Making Sense of the Chop & Re-Thinking Momentum

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Summary: While we’re technically in the tail end of Summer, it hasn’t felt like it this week, due to the momentum and equity reversal. Still, volumes and HF turnover remain light—they were about -1z this past week (even on Wed). With performance still up MTD despite taking a hit this week, and gross flows in the process of bottoming, alpha could improve over the next few months, but the path remains tricky.

1. How bad is HF performance? Our estimates are almost exactly the same as they were 2 weeks ago…All Strategy returns are back to +0.8% MTD (they were >2% early this week). Crowding in the US has suffered due to shorts rallying sharply, but there are signs the worst could be behind us. 2. Will we see re-grossing? Rolling 20d gross flows in the US have bottomed and are getting less negative…and every year since 2018 we’ve seen 20d gross flows turn positive by mid-Sep. 3. What’s the view on momentum from here? Momentum reversed lower this week and HF positioning continues to decline. Ultimately, the deep drawdown seen recently has historically been followed by much more mixed future returns (vs. consistent rebounds post shallow declines). Hence the view is unclear, though the two deep drawdowns that occurred around mid-year (i.e. in line with seasonal de-grossing) were followed by rebounds over the next 20d/60d, which could offer a glimmer of hope. 4. Are investors turning more cautious? Sort of…HF net flows in the US remain negative and overall positioning changes have been very neutral in the past 1wk/4wks. Our US TPM is ~40th %-tile (i.e. slightly below average), but both retail and institutional sentiment continues to trend higher, which could be positive for the market on a medium term basis. 5. What sectors/themes look interesting? AI Vulnerable vs. Core continue to see a rotation / unwind even if Semis vs. Software rotation in flows are slowing. HC in the US could continue to do well (as HF positioning hasn’t rebounded that much and ETF flows remain positive), though EU HC could also do better through the end of Q3 and we’re seeing HFs turn more bullish. Retail stocks have been hit negatively and we’ve seen HFs short pockets of these again (e.g. Global Brands), while Metals & Mining positioning does not look stretched despite the rally in the past month. EU Banks have been sold sharply by HFs which is interesting.

John Schlegel | | Jigar Vakharia | | Sunny Potharaju | |

JP Morgan Positioning Intelligence

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