Risk markets continue to trade in a benign fashion with equities making new record highs and credit spreads making new lows. As a result our overall defensive stance has generated another loss for our model portfolio in February although rather modest.
Major central banks such as the Fed and the ECB added additional fuel to the bullish sentiment over the past week by validating market expectations and by signaling that they will begin a rate cut cycle around mid year.
At the same time we believe that the very elevated equity positioning backdrop implies more downside for risk assets from here if the immaculate disinflation scenario does not play out as expected. As we highlighted previously in our publication, a flurry of indicators point to overbought conditions in equities. This is seen in our futures position proxy for S&P 500 futures in Figure 17 (based on cumulative daily changes of S&P 500 mini futures multiplied by the sign price change),the spec positions on US equity futures as reported by CFTC in proxied by the positions in US equity futures by Asset Managers and Leveraged funds), in the low short interest on SPY and QQQ ETFs in ETFs, and in the momentum signals for major equity indices as indicated in our proxies of how momentum traders such as CTAs are positioned. - J.P. Morgan Cross Asset Strategy
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