JP Morgan’s Cheng Predicts Trade Revival Amid Market Shift

    Stock markets in January saw violent moves in S&P 500 index, adding insult to injury. Machines dominated the Momentum trades known to exploit the daily stock market

    JP Morgan Chase & Co quant thinks that rebound is in the offing in Wall Street as players are no more plunging lock stock and barrel. Index funds as automated investors are growing on major stock exchanges, and day-to-day stock patterns which are highly reliable are making a comeback as per JP Morgan’s Peng Cheng. Cheng’s intraday trend model is up in February, the highest since June 2020. 

    As per Bloomberg News, a JP Morgan index trade showed steady gains since 2019 through two years, racking up massive profits in the peak months during the pandemic marked with consistent buying and selling. The approach can be seen in various sizes and shapes depending on how the quaint models it. 

    As per Cheng’s research recently, these strategies have faltered from 2021, the casualty caused by their popularity. The year has started with excessive volatility caused by the Federal Reserve’s anticipated move towards aggressive rate hikes and the Russia and Ukraine geopolitical tension. The S&P suffered from a 1% reversal intraday on four different occasions in January, either going up or down.

     These moves go against intraday trends following owning to its design. The systematic strategies can respond to the changing market dynamics as backtests validate them and appeal in the long run. The intraday momentum challenge faced by Wall Street quaint struggles to outperform in an era where any successful trade is packaged and publicized for clients. 

    According to practitioners of intraday trades, the appeal is based on a key idea backed by research. A movement in an asset early in the day can set the direction for the rest of the session. The trend is increasingly strengthened by the prominent money managers who leverage exchange-traded funds to balance their portfolios at the close of the day. 

    Cheng’s model is simple. If S&P500 is up from its previous day session’s close at 3.30 p.m., the trading sentiment is to go long. If the index is down from the last day, it puts on the short position. The money manager closes the position as he awaits the bell at 4 p.m. The bigger the move, the more significant is the bet.

    Cheng identifies two reasons for diminishing returns. First is that dealer shift in hedge positions and increasing long gamma positions since 2020. That means they need to go against the prevailing stock trend to ensure their exposure stays market neutral.

    Secondly, it is the crowding factor. Cheng designed a model that tracked order flow imbalance in the S&P 500 futures or the difference between buying and selling positions, a proxy for demand in equity.

    Cheng sees it as a sign of systematic reversible after an excellent 2020, leading to lackluster performance in intraday strategy later. The solution is to diversify the trade timings instead of making entry at 3.30 p.m. and exiting at 4 p.m. so that competitors do not front-run them. 

    Abhishek Mukhopadhyay, Strategist with Société Générale has an alternative approach. He overserved in a note last month intraday trends are usually stronger when liquidity is low. 


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