Sell into equity strength, JP Morgan says

Investors' expectations had become elevated - as revealed by the frosty reaction to the European Central Bank's latest policy announcement - reflecting that the best time to hold equities was now almost behind us, JP Morgan strategists said in a research note sent to clients.

"We fear that the strategic OW on equities we had for a number of years might not be appropriate anymore, giving way to a much more tactical positioning [...] use any strength as an opportunity to reduce equity allocation," the broker said.

Nevertheless, stocks would probably regain their footing and benefit from various positive influences over the next one to two months; such as supportive seasonals, a resilient Eurozone economy and a stabilising Chinese consumer.

The period running from October through January, and possibly into April, was "typically not the time of the year to get incrementally more bearish" it said.

As regards the Federal Reserve's next policy meeting, on 15-16 December, JP Morgan said it should be should be a positive for equity markets.

"A Fed back in the picture could help market internals, allowing new leadership to emerge."

Even so, "the phase of selling any rallies might be upon us," it added.

"Medium term headwinds revolve around stretched valuations and peaking US margins, especially given the deteriorating credit markets – 20 out of 21 US HY subsectors are seeing wider spreads vs one year ago."

The sector leadership on the way down might be unorthodox, in the same way as the leadership on the way up was lopsided. Look for Value, and Financials, to perform better. Stay OW Autos. The basket of Eurozone recovery plays remains attractive, despite strong run," JP Morgan said.

On 30 November 2015 JP Morgan recommended cutting equity overweighting to 5%.