JPMorgan: Deleveraging is only partially completed; US stocks may still need to remain volatile for the next three months

Deep Tide TechFlow message, according to market-momentum research: JPMorgan Chase’s July 15 fund flow report said that the deleveraging process launched in June is still ongoing; leverage ETFs, options, and margin accounts still have room for further contraction, and US stocks still face pressure in the short term. Since the June peak, the size of leveraged storage ETFs has shrunk by 34%, while leveraged ETFs across the whole market have shrunk by 13%. In terms of leveraged product structure, there is “convexity loss”: during range-bound consolidation it continuously consumes its own scale, and it would still take about three more months of consolidation to return to the pre-April level.

The volume of retail bullish options purchases has fallen from the June 5 peak, but it still remains away from the historical bottom; margin account leverage is still at a level comparable to the peaks at the end of 2021 and mid-2018. Hedge fund leverage ratios have fallen from the June historical high, and their semiconductor positions have started to be reduced. Risk parity funds’ leverage has returned to normal. Looking at the medium to long term, long-term capital such as retail, CTAs, and sovereign funds still provides net demand support, with the year’s net equity demand about $275 billion. JPMorgan Chase believes that near-term volatility could be the tail end of deleveraging, rather than a signal of deterioration in fundamentals.