Beware a cascading ‘flash crash’ in stocks as everyone packs into the market’s most popular names, JPMorgan chief stock strategist says

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  • A inventory rally unwinding may include no warning, JPMorgan’s Dubravko Lakos-Bujas mentioned in a webinar.

  • Focus is so excessive that if one massive fund begins pulling out, it may set off a broad market fallout.

  • Cracks are already exhibiting as Apple and Tesla shares slide.

The fairness rally that is taken shares on a five-month tear may rupture with no warning, Dubravko Lakos-Bujas mentioned in a JPMorgan webinar on Wednesday.

Although it is unclear when this might occur, excessive market crowding has positioned shares for a pointy correction, the financial institution’s chief world fairness strategist warned.

“You may not want a catalyst, it could actually simply come at some point out of the blue and this has occurred previously, we have had flash crashes,” he mentioned.

“One large fund begins de-levering some positions, a second fund hears that and tries to re-position, third fund mainly will get caught off guard, and the subsequent factor you recognize, you begin having an even bigger and greater momentum unwind,” Lakos-Bujas mentioned for instance.

Not solely is that this a grim outlook for heavily-concentrated tech massive caps, however it will imply broader market fallout, he added, because the success of high equities, akin to Nvidia, is a driver of wider rally.

As traders proceed chasing large, high quality names, cracks on this high-momentum commerce are already exhibiting, he mentioned, stating Apple and Tesla’s slide. Although each corporations belong to the main “Magnificent Seven” inventory cohort, they’ve each dropped 11.9% and 30.69% year-to-date.

Based on Lakos-Bujas, the extent of crowding seen as we speak has solely been reached 3 times for the reason that 2008 crash, usually previous a correction.

“Everytime you had such a excessive diploma of crowding it was a query of, perhaps not days, however a query of weeks, or a month or two earlier than the momentum issue confronted an enormous fats left tail unwind,” he mentioned.

To account for this, he urged traders to start diversifying their trades, and keep away from being caught on the “mistaken facet” of any coming correction.

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