Marko Kolanovic Cops to Bad Stock Call, Sees Bullish Signal From Retail Investors

(Bloomberg) -- Conceding his prediction of a December rally in equities was “wrong,” JPMorgan strategist Marko Kolanovic said stocks may yet recover if contrarian signals tied to mass selling by individual investors play out according to history.

The bank's global head of macro quantitative and derivatives research pointed to outflows from equity funds that amounted to almost 0.5 percent of total assets under management, one of the biggest moves since 2008. He said that's a contrarian indicator, as retail investors tend to “sell at times of panic.”

Employing a strategy of buying stocks after withdrawals exceeded 0.25 percent of total assets has reaped gains of 6 percent in the following six months, while inflows of a similar size preceded declines, the firm's data showed.

Another bullish signal comes from pension funds, whose purchases helped stem the stock sell-off in the final days of 2018, according to Kolanovic. Contrary to retail flows, such institutional buying tends to bode well for future market returns.

“Both mutual fund and pension flows suggest positive market performance in the future,” Kolanovic wrote in a note. “Continued signs of economic slowdown reinforced investors' fears that a recession is around the corner, which is not our house view.”

Kolanovic had last predicted that the rout that started in October would die out before Christmas and give way to a year-end rally. Instead, the S&P 500 had its worst December since the Depression, tumbling 9.2 percent.

Aside from retail investors “fleeing the market,” Kolanovic blamed the rout on an “unprecedented collapse” in market liquidity, weakening fundamentals and more political uncertainty from Washington.

The analyst continues to predict the world's largest economy will avoid a recession, even as the S&P 500 continued its swoon Thursday. While stock-market declines can have a negative impact on the economy, fears they will cause a contraction are overdone, he said.

To contact the reporter on this story: Lu Wang in New York at lwang8@bloomberg.net

To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Dave Liedtka

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