JP Morgan’s widely followed market analyst says it’s time to buy the dip

J.P. Morgan is telling its clients to make the most of the market’s massive sell-off this week, as it’s almost over.

The bank’s widely followed analyst Marko Kolanovic said the dip was largely technical and followed the same selling template as the Dow’s massive drop in February.

“Given that equity indices already experienced comparable declines to February (and e.g. Russell 2000 even a bigger drawdown), we think that the current setup favors buying the dip,” Kolanovic, J.P. Morgan’s global quantitative and derivatives strategy analyst, said in a note to clients Friday. “A risk to the thesis is that market volatility continues to move higher which would result in further outflows from Volatility Targeting funds.”

February fears were largely similar to those of this week: rising yields and the Fed’s more hawkish stance. U.S. stock markets struggled to regain footing Friday after a 1,300-point drop earlier in the week.

“This risk is now balanced, and can turn into a positive impact, i.e. option hedgers buying equities,” Kolanovic said.

Kolanovic is regarded by many as an expert in volatility and derivatives and has gained some notoriety for his timely market calls. Some cite the circulation of his note on trading floors as a reason why stocks rolled over during a trading session in July last year.

The analyst said selling by CTAs, or commodity trading advisors, is “likely largely behind us,” and tends to happen relatively fast.

“CTAs have already executed the bulk of their selling,” he said. “The remaining part of systematic selling is from volatility targeting (insurance, parity funds, etc.) which will go on for several more days.”

Kolanovic said he expects the market to go higher into year-end and maintained the firm’s S&P 500 price target of 3,000.

“We expect a net positive earnings season in October, strong buyback activity in November, and positive seasonal effects in December,” he said.