Beware a cascading 'flash crash' in stocks as everyone packs into the market's most popular names, JPMorgan chief stock strategist says
- A stock rally unwinding could come with no warning, JPMorgan's Dubravko Lakos-Bujas said in a webinar.
- Concentration is so high that if one large fund begins pulling out, it could trigger a broad market fallout.
The equity rally that's taken stocks on a five-month tear could rupture with no warning, Dubravko Lakos-Bujas said in a JPMorgan webinar on Wednesday.
Though it's unclear when this could happen, extreme market crowding has positioned stocks for a sharp correction, the bank's chief global equity strategist warned.
"You might not need a catalyst, it can just come one day out of the blue and this has happened in the past, we've had flash crashes," he said.
"One big fund starts de-levering some positions, a second fund hears that and tries to re-position, third fund basically gets caught off guard, and the next thing you know, you start having a bigger and bigger momentum unwind," Lakos-Bujas said as an example.
Not only is this a grim outlook for heavily-concentrated tech large caps, but it would mean broader market fallout, he added, as the success of top equities, such as Nvidia, is a driver of wider rally.
As investors continue chasing big, quality names, cracks in this high-momentum trade are already showing, he said, pointing out Apple and Tesla's slide. Though both firms belong to the leading "Magnificent Seven" stock cohort, they have both dropped 11.9% and 30.69% year-to-date.
According to Lakos-Bujas, the level of crowding seen today has only been reached three times since the 2008 crash, often preceding a correction.
"Whenever you had such a high degree of crowding it was a question of, maybe not days, but a question of weeks, or a month or two before the momentum factor faced a big fat left tail unwind," he said.
To account for this, he urged investors to begin diversifying their trades, and avoid being caught on the "wrong side" of any coming correction.