- Conditions are forming that suggest a stock market bottom could be near, JPMorgan's Marko Kolanovic said.
- Kolanovic said the ongoing sell-off in stocks has been driven by an extremely hawkish Fed.
- Peaking inflation, extremely depressed investor positioning, and attractive valuations give Kolanovic confidence in his view.
The more than 20% year-to-date decline in the $4 could be nearing its end as "pre-conditions" for a stock market bottom are starting to form, $4 Marko Kolanovic said in a Monday note.
Kolanovic explained that much of the ongoing sell-off in stocks can be attributed to a very aggressive Federal Reserve, which issued $4 at its FOMC meeting last week in its ongoing bid to tame inflation.
But according to Kolanovic, who has $4 throughout this year's market decline, inflation is likely to start showing more concrete signs of peaking. That's because $4, US composite PMI is in contraction territory at 49, and a number of corporations are $4
"Therefore, the phase of strong payrolls will likely move behind us," Kolanovic said, adding that inflation will stay elevated, but more importantly, it will have peaked.
Peaking inflation, combined with attractive equity valuations and $4 suggest a market bottom could be imminent.
To Kolanovic's point, investors are growing increasingly bearish on the stock market. $4 showed just 17.7% of its respondents were bullish on the direction of stock prices over the next six months.
The spread between the bulls and bears of AAII's investor sentiment survey reached the fourth worst reading since 1987, according to data from $4. Meanwhile, $4 has fallen into the "Extreme Fear" zone with a reading of 18 out of 100.
Finally, this past Friday saw a record high in total put option trading, as investors piled into contracts that are designed to protect against further downside.
But overly bearish sentiment readings rarely (if ever) serve as a catalyst that will launch stock prices higher.
Instead, according to Kolanovic, a dovish Fed pivot could be the catalyst that sparks the market higher over the next few months.
"It should be increasingly probable that the next months could see some dovish tilt by the Fed," Kolanovic said. That would help drive another tactical bounce in growth stocks, according to the note, and could ultimately end the significant drop in the stock market.