Markets oversold in short-term, but profits will be a drag in the medium-term, JP Morgan says

A bounce in global equities may be headed investors' way soon, JP Morgan believed, but the best strategy remained to "use the rebound as an opportunity to sell," the broker added.

Some 'tactical' indicators were again signalling that equities might be starting to turn oversold, JP Morgan strategists Mislav Matejka, Emmanuel Cau, Prabhav Bhadani and Aditi Balachandar said in a research note sent to clients.

Over 66% of the MSCI World index's constituents were trading down by at least 20% from their 52-week highs and the Citigroup economic surprise index had been very weak for a while, "so it should not take much improved newsflow to drive stabilisation in sentiment," the broker said.

JP Morgan also noted recent better jobless claims and retail sales data, but cautioned that "current activity data might be flattered somewhat by milder weather this year."

Hence, "a near-term bounce, potentially a bigger and more durable one than the 6-8% up move we saw toward the end of January," might ensue, JP Morgan said.

Weakness expected in stocks in the second half of 2016

Nonetheless, the broker was quick to caution clients that "the three key lead indicators of the cycle remain: credit spreads, profit margins and the shape of the yield curve."

"Bigger picture, the key strategy in our view remains to use the rebound as an opportunity to sell."

Matejka and his team added that they expected further weakness in the equity-space in the backhalf of 2016.

In their view, the most pressing concern was that corporate profits were "rolling over" with fourth quarter earnings per share for S&P companies lower by 7% year-on-year - the most since 2009.

Over in Japan, the situation was not much better, JP Morgan added, with EPS down 4% and in Europe by 3% if the energy sector was excluded.

Profits were the key lead indicator for many variables, from corporate spend and the labour market to things such such as dividends, buybacks and mergers and acquisitions, they explained.