Bottom conditions are starting to form, according to JPM

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  • Conditions are forming that suggest a stock market bottom could be near, JPMorgan’s Marko Kolanovic said.
  • Kolanovic said the ongoing stock selloff was driven by an extremely hawkish Fed.
  • Spike inflation, extremely depressed investor positioning and attractive valuations give Kolanovic confidence.

The S&P 500’s more than 20% year-to-date decline may be coming to an end as the “preconditions” for a stock market bottom begin to form, JPMorgan’s Marko Kolanovic said in a Monday note.

Kolanovic explained that much of the ongoing sell-off in stocks can be attributed to a very aggressive Federal Reserve, which issued another outrageous 75 basis point interest rate hike at its FOMC meeting the week before. latest in its continued attempt to bring inflation under control.

But according to Kolanovic, who has remained firmly optimistic throughout the market’s decline this year, inflation should start to show more concrete signs of a peak. Indeed, oil prices continue to fall, the US composite PMI is in contraction territory at 49 and a number of companies are issuing profit warnings.

“Therefore, the high wage bill phase will probably pass behind us,” Kolanovic said, adding that inflation will remain high, but more importantly, it will have peaked.

The spike in inflation, combined with attractive equity valuations and extremely depressed investor positioning, suggests that a market bottom may be imminent.

For Kolanovic, investors are increasingly bearish in the stock market. AAII’s latest investor sentiment survey showed just 17.7% of its respondents were optimistic about the direction of stock prices over the next six months.

The gap between bulls and bears in AAII’s investor sentiment survey has reached the fourth worst reading since 1987, according to data from Fundstrat. Meanwhile, CNN’s Fear and Greed Index fell into the “Extreme Fear” zone with a reading of 18 out of 100.

Finally, last Friday, the total number of put option trades hit a record high as investors piled into contracts designed to protect against further declines.

But overly bearish sentiment readings rarely (if ever) serve as the catalyst that will launch stock prices higher.

Instead, according to Kolanovic, a dovish pivot from the Fed could be the catalyst that drives the market higher over the next few months.

“It should be increasingly likely that the next few months could see some dovish tilt from the Fed,” Kolanovic said. That would help drive another tactical rebound in growth stocks, the note said, and could ultimately end the stock market’s significant decline.

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