Don't 'Sell in May and Go Away', 'Buy in May and Go Away' Says JPMorgan's Kolanovic

April 30, 2021 10:24 AM EDT
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“Sell in May and go away”? Not really, according to JPMorgan’s quants Shawn Quigg and Marko Kolanovic.

Instead, they argue to “buy in May and go away” as value and cyclical plays are likely to outperform the rest of the market in summer.

“A continued rally in commodities, and a resurgence of Treasury yields higher, stand to be near-term catalysts for value and cyclical stocks. We believe a move favoring value and cyclicals is likely to accelerate into late spring and the summer. Additionally, while market depth has improved, it remains thin, which may also increase the risk of upside pricing gaps, particularly during the summer months,” strategists write in today’s note.

Recently, JPMorgan quants said that the reflation and reopening trade will continue amid higher yields and a rotation from growth, quality and defensive to value and cyclicals taking place.

“We believe this move is likely to accelerate as we move into late spring and the summer amid the reopening of the economy with the primary beneficiary being value and cyclical stocks. Importantly, we do not believe these developments are priced in, and believe the reopening and reflation trade will resume with a move that will be bigger than we saw early this year. A continued rally in commodities and a resurgence of Treasury yields higher stand to be near-term catalysts for value and cyclical stocks. Additionally, while market depth has improved, it remains thin, which may also increase the risk of upside pricing gaps.”

One of the biggest drivers for value and cyclical plays is expected to come from higher Treasury yields.

“The earnings season performing better than expected (here) is also easing broad market concerns, and the need for protection (i.e., buying Treasuries). Treasury yields are rebounding (10Y yield is up ~10 bps over the last week) and are now approaching the ~1.635% level, where a breakthrough could derail the bullish trend momentum for bond pricing, and suggests the trend to higher yields could again be underway. The 1-month trend momentum threshold rests at 1.635-1.74%. A break above that range could bring renewed bearish systematic flows, exacerbating a move in rates even higher. Favorable for value and cyclical stocks,” strategists note.

In this context, Kolanovic and Quigg highlight five stocks that may benefit in summer: Cleveland-Cliffs (NYSE: CLF), Delta Air Lines (NYSE: DAL), Synchrony Financial (NYSE: SYF), Marathon Petroleum (NYSE: MPC), and Phillips 66 (NYSE: PSX).



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