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A top Wall Street analyst offered an upbeat stock market outlook after a bout of steep selling.
The prediction was based on the fact that short sellers will be squeezed soon.
The macroeconomic outlook is strong despite the Omicron variant surge.
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The recent sell-off appears to have been too steep, and this could lead to moves by short sellers who will soon get squeezed, according to the chief global markets strategist at JP Morgan.
The quant guru said in a note published Friday that US stocks are off their highs. The overall market is up 22% for the year, according to the Russell 3000.
The divergence is unknown to us, and indicates a historically unprecedented overshoot in selling smaller, more volatile, typically value and cyclical stocks in the last 4 weeks.
Headlines say the market decline is due to the Federal Reserve's morehawkish stance. De-risking and shorting from hedge funds are the reasons for actual selling.
The conditions needed for a successful short-selling effort don't exist, so the market may end up in a short squeeze and a rally into the end of the year.
He pointed out that risk-parity and volatility-targeting funds are adding exposure. The situation from a technical or fundamental perspective doesn't resemble the stock market debacle of the fourth quarter of last year.
The markets and retail investors have shown resilience in the past weeks, and there is likely to be aggressive shorting in hopes of declines in retail equity position and cryptocurrencies holdings.
The shorts looked to get squeezed. He expects a rally in small-cap, value and cyclical stocks in January. The closing of short positions may have a bigger impact on the market than the opening of them.
The Omicron variant appears to be less threatening to the stock market outlook. The fatality rates are not spiking even though people are more vulnerable to infections. In countries with a surge in cases like South Africa and the UK, deaths have been declining in recent weeks.
The Omicron variant is more transmissible than the Delta variant but produces milder symptoms.
On Wednesday, he released another note that outlined three reasons why he thinks equities will rise next year.
"We continue to see upside in equities on better than expected earnings growth, China/emerging market backdrop improving, and normalized consumer spending habits," he said.
Business Insider has an original article.
