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JPMorgan's Dubravko Lakos Bujas said in a webinar that a reversal in stock price gains can happen without warning.
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It's so concentrated that if one large fund starts pulling out, it could cause the entire market to crash.
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Fissures are already appearing as Apple and Tesla's stock prices fall.
Dubravko Lakos Bujas said in a JPMorgan webinar on Wednesday that the stock rally that has propelled stocks for the first time in five months could collapse without warning.
It's unclear when this will happen, but the bank's chief global equity strategist warned that extreme market congestion could lead to a sharp correction in stock prices.
„You may not need a catalyst. It could happen one day. This has happened in the past, there have been flash crashes,“ he said.
“One large fund starts deleveraging some positions, a second fund hears about it and tries to change its positions, and the third fund is basically caught off guard and the next thing you know, , more and more momentum starts to unwind,“ Lakos said. – Bujas said as an example:
It added that this is not only a grim outlook for companies with a high concentration of tech large-cap stocks, but also implications for the broader market due to the success of top stocks such as: Nvidiaa wide range of rally drivers.
He said cracks are already appearing in this high-momentum trade as investors continue to chase big, high-quality names. apple and Tesla's slide. Both companies, which are part of the major Magnificent Seven stock cohort, have both declined 11.9% and 30.69% year-to-date.
The congestion levels seen today have only been reached three times since the 2008 crash, and were often preceded by corrections, Lakos Bouhas said.
„When congestion was this high, it was probably a matter of weeks, maybe even a month or two, rather than days, before the momentum factor faced a big left tail unwind,“ he said.
To illustrate this, he urged investors to start diversifying their trades and not get caught on the „wrong side“ of the upcoming correction.
Read original article business insider