Kolanovic

Table of Contents
Rpt. 66750667 MARKET AND VOLATILITY COMMENTARY : V-SHAPED RECOVERY, LOW POSI 2-7
14-Feb-2019 JPMORGAN
- KOLANOVIC, MARKO, ET AL
Rpt. 66543024 MARKET AND VOLATILITY COMMENTARY : NARRATIVE VS. FLOWS, LIQUID 8 - 17
16-Jan-2019 JPMORGAN
Rpt. 66454994 MARKET AND VOLATILITY COMMENTARY : DECEMBER POST-MORTEM, SIGNA 18 - 25

03-Jan-2019 JPMORGAN
These reports were compiled using a product of Thomson Reuters www.thomsonreuters.com
1
Global Quantitative &
Derivatives Strategy
14 February 2019
Market and Volatility

Commentary
V-Shaped Recovery, Low Positioning = More Upside,
Commodity Sector Trades
The V-shaped recovery and Positioning Global Quantitative and

In early January we explained the flows behind the Q4 market collapse, AC
Marko Kolanovic, PhD
arguing that market should recover its losses (here, here). After an initial
(1-212) 272-1438
short covering rally, we argued that the market will continue drifting marko.kolanovic@jpmorgan.com
upwards due to structural inflows related to declining volatility (here). The Bram Kaplan, CFA
December-January V-shaped move was one of the most prominent in a (1-212) 272-1215
century, and occurred despite no improvements in the fundamental bram.kaplan@jpmorgan.com
outlook. Following the January rally, our S&P 500 price target (3000) is J.P. Morgan Securities LLC
no longer considered outlandish by most. Calls from various strategists for

a 1929-style recession, rolling bear market, or imminent retest of lows are
now getting quieter.
How does the equity positioning look now? With declining volatility and
rising prices, Hedge Funds increased their gross exposure, but they did not
significantly increase net exposure. For instance, our prime brokerage data
show net equity exposure in only the 6th percentile, and the equity beta of a
broad global HF index is in the ~15th percentile. Multi-asset risk
controlled portfolios still have very low exposure to stocks. Modelling the
risk control market based on our survey of quantitative clients’ volatility
targeting practices implies that the equity exposure and overall leverage of
this market is still very low (~10th percentile, risk controlled assets include
insurance products, various multi manager platforms, dealer structured
products, etc.). Another group of managers invest based on price trends.
Interestingly, these investors are still short equities, despite the recent rally.
With various trend signals turning positive (e.g. 3M and 12M for S&P 500,
and 1M for various international indices) one would expect these investors
to start adding equity longs. Note that trend following investors are
currently long bonds, and the low equity position of volatility targeting
investors also implies high bond allocations. This can help explain the
current low bond yields despite an impressive equity rally. After record
mutual fund outflows in December, the data doesn’t show any meaningful
inflows in January. Given the market rally, dealers’ gamma positioning is
neutral or long – this is favoring low and declining volatility, and further
re-levering of various investors. In summary, important groups of
systematic and fundamental investors did not re-risk and missed a
significant portion of the rally. This includes volatility sensitive managers,
trend followers, and to a large extent hedge funds and retail. If volatility
stays contained (and this is favored by gamma positioning), re-risking
should continue.
See page 3 for analyst certification and important disclosures.

J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the
firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in
making their investment decision.
www.jpmorganmarkets.com
2
Marko Kolanovic, PhD Global Quantitative & Derivatives Strategy
(1-212) 272-1438 14 February 2019
marko.kolanovic@jpmorgan.com
In terms of flows, liquidity and volatility, there is a parallel between the

Feb-April 2018 and Oct-Dec 2018 selloffs. Following Feb-April, we
entered a re-risking period in May-October 2018 (we forecasted that re-
leveraging in our ‘buy in May’ note, see here). Absent a negative outcome
from the ongoing trade negotiations with China, we could have a similar
re-leveraging period stretching from January to May this year. This should
work as a positive feedback loop between options gamma that is
suppressing volatility, systematic inflows (on account of trend and low
volatility managers), and fundamental inflows (HFs/retail). What are the
risks? In addition to various tail risks, by far the largest risk would be a
failure in trade negotiations with China. A decline in the President’s
approval rating (e.g. see here) on the back of the government shutdown and
Q4 market selloff, may result in some market stability near term and may
improve the likelihood of a positive outcome from trade negotiations. If the
rally continues, investors would need to monitor the pace of re-leveraging
and start hedging once the leverage of various investor cohorts becomes
high. For instance, we are now in the ~10-20th percentile, and one could
run long until exposure reaches the ~70-80th percentile, when the risk of
another market seizure increases. This re-levering cycle could last between
now and e.g. May (in which case, we could go back to the normal ‘sell in
May’ seasonal schedule this year).
Commodity Sector Trades

Clients that missed the nearly 20% market recovery since the December
bottom are asking which market segments present the best opportunity for
a ‘catch up’ trade. We believe one such market segment is Energy and
Materials (e.g. see this note and our year ahead sector ratings). While a
catalyst for the commodity decline in Q4 was the growth slowdown, moves
were exaggerated by geopolitical developments (e.g. Trump ‘phone calls’)
as well as speculative and systematic investor flows such as trend followers
(and to a lesser extent risk parity portfolios). A positive outcome from
China negotiations could prompt these investors to reverse positions and
lead to a sharp reversal of Q4 losses. For instance, looking at the history of
CFTC data for managed money (and/or non-commercial) positions in Oil,
we note a decline in positions that is unprecedented in history (~400K
contracts last year, and ~250K in Q4). Just the passage of time would cause
1-3M Oil momentum to turn positive in the near future, and likely lead to
closing of some trend following shorts. Additionally, a decline in volatility
and correlations would result in increased GSCI allocation by e.g. risk
parity funds. If even half of the decline in speculative open interest is
reversed, it would likely result in ~$10 upside for Oil, prompting trend
investors to go long. A similar setup has developed in other commodities
such as industrial metals, and this could present an opportunity to capture
potential progress on China trade negotiations.
3
(1-212) 272-1438 14 February 2019
Analyst Certification: All authors named within this report are research analysts unless otherwise specified.The research analyst(s)
denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the
research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that
the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views
about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be
directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. For all Korea-
based research analysts listed on the front cover, they also certify, as per KOFIA requirements, that their analysis was made in good faith
and that the views reflect their own opinion, without undue influence or intervention.
Important Disclosures
This report is a product of the research department's Global Quantitative and Derivatives Strategy group. Views expressed may differ
from the views of the research analysts covering stocks or sectors mentioned in this report. Structured securities, options, futures and
other derivatives are complex instruments, may involve a high degree of risk, and may be appropriate investments only for sophisticated
investors who are capable of understanding and assuming the risks involved. Because of the importance of tax considerations to many
option transactions, the investor considering options should consult with his/her tax advisor as to how taxes affect the outcome of
contemplated option transactions.
Company-Specific Disclosures: Important disclosures, including price charts and credit opinion history tables, are available for
compendium reports and all J.P. Morgan–covered companies by visiting https://www.jpmm.com/research/disclosures, calling 1-800-477-
0406, or e-mailing research.disclosure.inquiries@jpmorgan.com with your request. J.P. Morgan’s Strategy, Technical, and Quantitative
Research teams may screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call 1-800-477-
0406 or e-mail research.disclosure.inquiries@jpmorgan.com.
Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe:
J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the
average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve
months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s)
coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of
the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if
applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy
reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a
recommendation or a rating. In our Asia (ex-Australia and ex-India) and U.K. small- and mid-cap equity research, each stock’s expected
total return is compared to the expected total return of a benchmark country market index, not to those analysts’ coverage universe. If it
does not appear in the Important Disclosures section of this report, the certifying analyst’s coverage universe can be found on J.P.
Morgan’s research website, www.jpmorganmarkets.com.
J.P. Morgan Equity Research Ratings Distribution, as of January 02, 2019

Overweight Neutral Underweight
(buy) (hold) (sell)
J.P. Morgan Global Equity Research Coverage 46% 40% 14%
IB clients* 53% 47% 37%
JPMS Equity Research Coverage 44% 41% 15%
IB clients* 75% 65% 56%
*Percentage of subject companies within each of the "buy," "hold" and "sell" categories for which J.P. Morgan has provided investment banking services
within the previous 12 months.
For purposes only of FINRA ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating
category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table above.
This information is current as of the end of the most recent calendar quarter.
Equity Valuation and Risks: For valuation methodology and risks associated with covered companies or price targets for covered
companies, please see the most recent company-specific research report at http://www.jpmorganmarkets.com, contact the primary analyst
or your J.P. Morgan representative, or email research.disclosure.inquiries@jpmorgan.com. For material information about the proprietary
models used, please see the Summary of Financials in company-specific research reports and the Company Tearsheets, which are
available to download on the company pages of our client website, http://www.jpmorganmarkets.com. This report also sets out within it
the material underlying assumptions used.
Analysts' Compensation: The research analysts responsible for the preparation of this report receive compensation based upon various
factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues.
4
(1-212) 272-1438 14 February 2019
Other Disclosures
J.P. Morgan is a marketing name for investment banking businesses of JPMorgan Chase & Co. and its subsidiaries and affiliates worldwide.
All research reports made available to clients are simultaneously available on our client website, J.P. Morgan Markets. Not all research content is
redistributed, e-mailed or made available to third-party aggregators. For all research reports available on a particular stock, please contact your sales
representative.
Any data discrepancies in this report could be the result of different calculations and/or adjustments.
Options and Futures related research: If the information contained herein regards options or futures related research, such information is available only
to persons who have received the proper options or futures risk disclosure documents. Please contact your J.P. Morgan Representative or visit
https://www.theocc.com/components/docs/riskstoc.pdf for a copy of the Option Clearing Corporation's Characteristics and Risks of Standardized Options
or http://www.finra.org/sites/default/files/Security_Futures_Risk_Disclosure_Statement_2018.pdf for a copy of the Security Futures Risk Disclosure
Statement.
Principal Trading: J.P. Morgan trades or may trade as principal in the derivatives or the debt securities (or related derivatives) that are the subject of this
report.
Private Bank Clients: Where you are receiving research as a client of the private banking businesses offered by JPMorgan Chase & Co. and its
subsidiaries (“J.P. Morgan Private Bank”), research is provided to you by J.P. Morgan Private Bank and not by any other division of J.P. Morgan,
including but not limited to the J.P. Morgan corporate and investment bank and its research division.
Legal Entities Disclosures

U.S.: JPMS is a member of NYSE, FINRA, SIPC and the NFA. JPMorgan Chase Bank, N.A. is a member of FDIC. Canada: J.P. Morgan Securities
Canada Inc. is a registered investment dealer, regulated by the Investment Industry Regulatory Organization of Canada and the Ontario Securities
Commission and is the participating member on Canadian exchanges. U.K.: JPMorgan Chase N.A., London Branch, is authorised by the Prudential
Regulation Authority and is subject to regulation by the Financial Conduct Authority and to limited regulation by the Prudential Regulation Authority.
Details about the extent of our regulation by the Prudential Regulation Authority are available from J.P. Morgan on request. J.P. Morgan Securities plc
(JPMS plc) is a member of the London Stock Exchange and is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct
Authority and the Prudential Regulation Authority. Registered in England & Wales No. 2711006. Registered Office 25 Bank Street, London, E14 5JP.
Germany: This material is distributed in Germany by J.P. Morgan Securities plc, Frankfurt Branch which is regulated by the Bundesanstalt für
Finanzdienstleistungsaufsich and also by J.P. Morgan AG (JPM AG) which is a member of the Frankfurt stock exchange and is regulated by the Federal
Financial Supervisory Authority (BaFin), JPM AG is a company incorporated in the Federal Republic of Germany with registered office at Taunustor 1,
60310 Frankfurt am Main, the Federal Republic of Germany. South Africa: J.P. Morgan Equities South Africa Proprietary Limited is a member of the
Johannesburg Securities Exchange and is regulated by the Financial Services Board. Hong Kong: J.P. Morgan Securities (Asia Pacific) Limited (CE
number AAJ321) is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission in Hong Kong and/or J.P. Morgan
Broking (Hong Kong) Limited (CE number AAB027) is regulated by the Securities and Futures Commission in Hong Kong. Korea: This material is issued
and distributed in Korea by or through J.P. Morgan Securities (Far East) Limited, Seoul Branch, which is a member of the Korea Exchange(KRX) and is
regulated by the Financial Services Commission (FSC) and the Financial Supervisory Service (FSS). Australia: J.P. Morgan Securities Australia Limited
(JPMSAL) (ABN 61 003 245 234/AFS Licence No: 238066) is regulated by ASIC and is a Market, Clearing and Settlement Participant of ASX Limited
and CHI-X. Taiwan: J.P. Morgan Securities (Taiwan) Limited is a participant of the Taiwan Stock Exchange (company-type) and regulated by the Taiwan
Securities and Futures Bureau. India: J.P. Morgan India Private Limited (Corporate Identity Number - U67120MH1992FTC068724), having its registered
office at J.P. Morgan Tower, Off. C.S.T. Road, Kalina, Santacruz - East, Mumbai – 400098, is registered with Securities and Exchange Board of India
(SEBI) as a ‘Research Analyst’ having registration number INH000001873. J.P. Morgan India Private Limited is also registered with SEBI as a member of
the National Stock Exchange of India Limited (SEBI Registration Number - INB 230675231/INF 230675231/INE 230675231), the Bombay Stock
Exchange Limited (SEBI Registration Number - INB 010675237/INF 010675237) and as a Merchant Banker (SEBI Registration Number -
MB/INM000002970). Telephone: 91-22-6157 3000, Facsimile: 91-22-6157 3990 and Website: www.jpmipl.com. For non local research reports, this
material is not distributed in India by J.P. Morgan India Private Limited. Thailand: This material is issued and distributed in Thailand by JPMorgan
Securities (Thailand) Ltd., which is a member of the Stock Exchange of Thailand and is regulated by the Ministry of Finance and the Securities and
Exchange Commission and its registered address is 3rd Floor, 20 North Sathorn Road, Silom, Bangrak, Bangkok 10500. Indonesia: PT J.P. Morgan
Sekuritas Indonesia is a member of the Indonesia Stock Exchange and is regulated by the OJK a.k.a. BAPEPAM LK. Philippines: J.P. Morgan Securities
Philippines Inc. is a Trading Participant of the Philippine Stock Exchange and a member of the Securities Clearing Corporation of the Philippines and the
Securities Investor Protection Fund. It is regulated by the Securities and Exchange Commission. Brazil: Banco J.P. Morgan S.A. is regulated by the
Comissao de Valores Mobiliarios (CVM) and by the Central Bank of Brazil. Mexico: J.P. Morgan Casa de Bolsa, S.A. de C.V., J.P. Morgan Grupo
Financiero is a member of the Mexican Stock Exchange and authorized to act as a broker dealer by the National Banking and Securities Exchange
Commission. Singapore: This material is issued and distributed in Singapore by or through J.P. Morgan Securities Singapore Private Limited (JPMSS)
[MCI (P) 099/04/2018 and Co. Reg. No.: 199405335R], which is a member of the Singapore Exchange Securities Trading Limited and/or JPMorgan Chase
Bank, N.A., Singapore branch (JPMCB Singapore) [MCI (P) 046/09/2018], both of which are regulated by the Monetary Authority of Singapore. This
material is issued and distributed in Singapore only to accredited investors, expert investors and institutional investors, as defined in Section 4A of the
Securities and Futures Act, Cap. 289 (SFA). This material is not intended to be issued or distributed to any retail investors or any other investors that do not
fall into the classes of “accredited investors,” “expert investors” or “institutional investors,” as defined under Section 4A of the SFA. Recipients of this
document are to contact JPMSS or JPMCB Singapore in respect of any matters arising from, or in connection with, the document. Japan: JPMorgan
Securities Japan Co., Ltd. and JPMorgan Chase Bank, N.A., Tokyo Branch are regulated by the Financial Services Agency in Japan. Malaysia: This
material is issued and distributed in Malaysia by JPMorgan Securities (Malaysia) Sdn Bhd (18146-X) which is a Participating Organization of Bursa
Malaysia Berhad and a holder of Capital Markets Services License issued by the Securities Commission in Malaysia. Pakistan: J. P. Morgan Pakistan
Broking (Pvt.) Ltd is a member of the Karachi Stock Exchange and regulated by the Securities and Exchange Commission of Pakistan. Saudi Arabia: J.P.
Morgan Saudi Arabia Ltd. is authorized by the Capital Market Authority of the Kingdom of Saudi Arabia (CMA) to carry out dealing as an agent,
5
(1-212) 272-1438 14 February 2019
arranging, advising and custody, with respect to securities business under licence number 35-07079 and its registered address is at 8th Floor, Al-Faisaliyah
Tower, King Fahad Road, P.O. Box 51907, Riyadh 11553, Kingdom of Saudi Arabia. Dubai: JPMorgan Chase Bank, N.A., Dubai Branch is regulated by
the Dubai Financial Services Authority (DFSA) and its registered address is Dubai International Financial Centre - Building 3, Level 7, PO Box 506551,
Dubai, UAE. Russia: CB J.P. Morgan Bank International LLC is regulated by the Central Bank of Russia. Argentina: JPMorgan Chase Bank Sucursal
Buenos Aires is regulated by Banco Central de la República Argentina (“BCRA”- Central Bank of Argentina) and Comisión Nacional de Valores (“CNV”-
Argentinian Securities Commission”)
Country and Region Specific Disclosures

U.K. and European Economic Area (EEA): Unless specified to the contrary, issued and approved for distribution in the U.K. and the EEA by JPMS plc.
Investment research issued by JPMS plc has been prepared in accordance with JPMS plc's policies for managing conflicts of interest arising as a result of
publication and distribution of investment research. Many European regulators require a firm to establish, implement and maintain such a policy. Further
information about J.P. Morgan's conflict of interest policy and a description of the effective internal organisations and administrative arrangements set up
for the prevention and avoidance of conflicts of interest is set out at the following link https://www.jpmorgan.com/jpmpdf/1320742677360.pdf. This report
has been issued in the U.K. only to persons of a kind described in Article 19 (5), 38, 47 and 49 of the Financial Services and Markets Act 2000 (Financial
Promotion) Order 2005 (all such persons being referred to as "relevant persons"). This document must not be acted on or relied on by persons who are not
relevant persons. Any investment or investment activity to which this document relates is only available to relevant persons and will be engaged in only
with relevant persons. In other EEA countries, the report has been issued to persons regarded as professional investors (or equivalent) in their home
jurisdiction. Australia: This material is issued and distributed by JPMSAL in Australia to "wholesale clients" only. This material does not take into
account the specific investment objectives, financial situation or particular needs of the recipient. The recipient of this material must not distribute it to any
third party or outside Australia without the prior written consent of JPMSAL. For the purposes of this paragraph the term "wholesale client" has the
meaning given in section 761G of the Corporations Act 2001. J.P. Morgan’s research coverage universe spans listed securities across the ASX All
Ordinaries index, securities listed on offshore markets, unlisted issuers and investment products which Research management deem to be relevant to the
investor base from time to time. J.P. Morgan seeks to cover companies of relevance to the domestic and international investor base across all GIC sectors,
as well as across a range of market capitalisation sizes. Germany: This material is distributed in Germany by J.P. Morgan Securities plc, Frankfurt Branch
which is regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht. Hong Kong: The 1% ownership disclosure as of the previous month end
satisfies the requirements under Paragraph 16.5(a) of the Hong Kong Code of Conduct for Persons Licensed by or Registered with the Securities and
Futures Commission. (For research published within the first ten days of the month, the disclosure may be based on the month end data from two months
prior.) J.P. Morgan Broking (Hong Kong) Limited is the liquidity provider/market maker for derivative warrants, callable bull bear contracts and stock
options listed on the Stock Exchange of Hong Kong Limited. An updated list can be found on HKEx website: http://www.hkex.com.hk. Korea: This report
may have been edited or contributed to from time to time by affiliates of J.P. Morgan Securities (Far East) Limited, Seoul Branch. Singapore: As at the
date of this report, JPMSS is a designated market maker for certain structured warrants listed on the Singapore Exchange where the underlying securities
may be the securities discussed in this report. Arising from its role as designated market maker for such structured warrants, JPMSS may conduct hedging
activities in respect of such underlying securities and hold or have an interest in such underlying securities as a result. The updated list of structured
warrants for which JPMSS acts as designated market maker may be found on the website of the Singapore Exchange Limited: http://www.sgx.com. In
addition, JPMSS and/or its affiliates may also have an interest or holding in any of the securities discussed in this report – please see the Important
Disclosures section above. For securities where the holding is 1% or greater, the holding may be found in the Important Disclosures section above. For all
other securities mentioned in this report, JPMSS and/or its affiliates may have a holding of less than 1% in such securities and may trade them in ways
different from those discussed in this report. Employees of JPMSS and/or its affiliates not involved in the preparation of this report may have investments
in the securities (or derivatives of such securities) mentioned in this report and may trade them in ways different from those discussed in this report.
Taiwan: Research relating to equity securities is issued and distributed in Taiwan by J.P. Morgan Securities (Taiwan) Limited, subject to the license scope
and the applicable laws and the regulations in Taiwan. According to Paragraph 2, Article 7-1 of Operational Regulations Governing Securities Firms
Recommending Trades in Securities to Customers (as amended or supplemented) and/or other applicable laws or regulations, please note that the recipient
of this material is not permitted to engage in any activities in connection with the material which may give rise to conflicts of interests, unless otherwise
disclosed in the “Important Disclosures” in this material. India: For private circulation only, not for sale. Pakistan: For private circulation only, not for
sale. New Zealand: This material is issued and distributed by JPMSAL in New Zealand only to persons whose principal business is the investment of
money or who, in the course of and for the purposes of their business, habitually invest money. JPMSAL does not issue or distribute this material to
members of "the public" as determined in accordance with section 3 of the Securities Act 1978. The recipient of this material must not distribute it to any
third party or outside New Zealand without the prior written consent of JPMSAL. Canada: This report is distributed in Canada by or on behalf of
J.P.Morgan Securities Canada Inc. The information contained herein is not, and under no circumstances is to be construed as an offer to sell securities
described herein, or solicitation of an offer to buy securities described herein, in Canada or any province or territory thereof. The information contained
herein is under no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the
recipient.
General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co.
or its affiliates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to
JPMS and/or its affiliates and the analyst's involvement with the issuer that is the subject of the research. All pricing is indicative as of the close of market
for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change
without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any
financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not
intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own
independent decisions regarding any securities or financial instruments mentioned herein. JPMS distributes in the U.S. research published by non-U.S.
affiliates and accepts responsibility for its contents. Periodic updates may be provided on companies/industries based on company specific developments or
announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P.
Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise.
"Other Disclosures" last revised January 19, 2019.
6
(1-212) 272-1438 14 February 2019
Copyright 2019 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or
redistributed without the written consent of J.P. Morgan. #$J&098$#*P
6
Completed 14 Feb 2019 12:10 PM EST Disseminated 14 Feb 2019 12:10 PM EST
7
16 January 2019

Commentary
Narrative vs. Flows, Liquidity-Volatility-Flows
Feedback Loop, QE/QT and Liquidity
Narrative vs. Flows Global Quantitative and

Since our last note, the market continued moving higher from heavily oversold AC
levels and low investor positioning. Positioning has somewhat increased but still Marko Kolanovic, PhD
remains subdued (all HF beta: ~9th %ile, Volatility Targeting Beta: ~1st %ile, (1-212) 272-1438
CTA beta ~15th %ile, Equity HF beta ~8th %ile, JPM PB HF net exposure ~7th
%ile, gross exposure ~10th %ile). S&P 500 options gamma imbalance subsided Bram Kaplan, CFA
(1-212) 272-1215
from an average ~$50bn towards puts (dealers short gamma) in December to
bram.kaplan@jpmorgan.com
slightly long gamma now. This creates a necessary condition for market volatility J.P. Morgan Securities LLC
to decline and continue driving equity inflows from volatility-sensitive strategies.
These strategies are currently adding ~$1bn per day (e.g., volatility targeted
insurance portfolios), which will accelerate if volatility stays subdued. While fixed
weight portfolios (e.g., pensions) increased risk the last week of December, they
may reduce risk the last week of January. Trend investors could close some
shorts/add longs if the market moves a bit higher to reclaim short-term signals
(e.g., 50d MA, 1M return). Two key risks that we highlighted in the past (Fed’s
monetary policy and trade war) have subsided, but new risks have emerged: US
government shutdown and signs of additional slowdown outside the US. Risks
around the upcoming earnings season are balanced, in our view. On one hand, we
could see further downside for Q1 guidance, but on the other hand already reduced
expectations and low positioning can result in upside moves. Low positioning
could manifest itself as stocks moving higher on underwhelming results (e.g.,
stocks open lower and drift higher).
Bearish sentiment and narrative are currently consensus among investors, and
positioning is very low. Investors should keep in mind that the narrative is often
driven by price action, and price action is driven by flows and positioning. For
instance, during the May-October period last year, there were strong inflows on
account of declining volatility in the aftermath of the Feb-April turmoil. These
flows pushed the market higher, despite negative seasonality, the fact that the trade
war was escalating, and that there were expectations for a continuation of the
quarterly rate hikes at the time. Once deleveraging started in Q4, stocks were
moving lower regardless of the narrative (e.g., many stocks sold off on decent Q3
earnings and the market sold off after the G20 and Powell pivot). At the very end
of the year, stocks first crashed and then strongly rallied on virtually no news but
large flows (mutual fund selling, pension fund buying). One should keep in mind
that if volatility stays low, inflows may result in the market drifting higher, which
could in turn change investor sentiment and the whole market narrative.

8
(1-212) 272-1438 16 January 2019
Liquidity-Volatility-Flows Feedback Loop

In our previous note we described in broad terms the feedback loop between
volatility, liquidity, and flows. We call this feedback loop market fragility. Several
clients asked us to explain in more detail these effects (e.g., how, how much?).
Interest for this topic comes from various clients – those that are assessing the impact
of flows to the broad market and their portfolios (fund managers), those that position
for and anticipate these flows (speculators), and those that are assessing the
robustness of different systematic investments (investors). As we mentioned in our
last note, systematic flows come from different parts of the financial industry (market
making, buy side, insurance), and can result in different flow patterns.
First we want to demonstrate the link between Volatility and Liquidity, and show
how market depth – the key measure of liquidity – got worse over time. Figure 1
shows the relationship between S&P 500 futures market depth and the VIX. One can
notice that this relationship is very strong and nonlinear (e.g., market depth declines
exponentially with the VIX). Given that an increase in volatility often results in
systematic selling, this relationship is the key to understand market fragility and tail
events. The second question was if this relationship was always the same or the
situation got worse over time. To answer this we show the historical relationship
between liquidity and the VIX over time (Figure 2, rolling regression slope between
liquidity and the VIX). One can see that the negative relationship between liquidity
and the VIX got worse over the past decade (note that an exponential relationship can
be locally approximated with a linear relationship and tracked over time). Finally, we
note that at times of high volatility, the VIX is almost the sole driver of market
liquidity. Figure 3 shows the % of liquidity variation that can be explained with the
VIX over time (rolling R-squared). The higher the VIX, the more liquidity is driven
by the VIX, and recently up to ~80% of liquidity variations were explained by the
VIX. To conclude, we showed that there is a negative relationship between volatility
and liquidity, that this relationship is getting stronger over time, and that it is
particularly strong during times of elevated volatility.
Figure 1: S&P 500 E-mini futures depth shows a strong (exponential) Figure 2: The regression slope between liquidity and the VIX got
relationship to the VIX larger over time
8000 1000 0
7000 S&P 500 Futures Depth vs VIX

0 -500
6000 2009 2011 2013 2014 2016 2018
-1000
5000 -1000
-2000
4000
-1500
3000 -3000
-2000
2000 -4000
1000 Liquidity - Slope to Implied Vol (VIX) -2500
-5000
Liquidity - Slope to Realized Vol (1M)
0
5 10 15 20 25 30 35 -6000 -3000
Source: J.P. Morgan QDS. Source: J.P. Morgan QDS.
9
(1-212) 272-1438 16 January 2019
Figure 3: The VIX explains a larger proportion of liquidity when the Figure 4: Comparative size of ‘short gamma’ strategies*
VIX is high
100%
% of Liquidity explained by VIX 24 800 S&P 500 Put Option Delta
CTA AUM
80% 22
600 Volatility Targeting AUM
VIX (1M Avg.) 20
60%
18 400
40% 16
200
14
20%
12 0
0% 10 1997 2001 2005 2009 2013 2017
2015 2016 2016 2017 2018 Source: J.P. Morgan QDS, BarclayHedge. *Volatility Targeting AUM time series is purely
Source: J.P. Morgan QDS. illustrative/very approximate
We will next show that volatility also plays a significant role in determining the
flows from various systematic strategies (note that we define systematic flows to
include derivatives hedging flows, passive and quantitative investment strategies
flows, insurance industry and programmatic market making flows). An increase in
volatility typically leads to an increase in systematic selling, which happens in an
environment of reduced liquidity, and hence can produce outsized market impact. As
mentioned above, we refer to this feedback loop between volatility, liquidity and
flows as market fragility. We do note that during times of high volatility/low
liquidity, not only systematic strategies but also discretionary managers sell, albeit
typically they tend to sell slower and/or later during the sell-off episodes (see further
below).
Let’s look at the various examples of systematic flows, their impact on the market
and their own performance, and speculative activity related to these flows. The
largest of all systematic flows by size and impact is that of index options hedging.
Figure 4 shows the delta weighted open interest of S&P 500 index puts, in
comparison with an asset estimate of two other ‘short gamma’ strategies –
CTAs/Trend-Following and Volatility Targeting strategies. One can see that the
largest component of systematic flows comes from option hedging, but given the
increase of trend-following and volatility targeting these components cannot be
ignored.
We have extensively documented the impact of index option hedging flows in our
previous research (see here, here). We also closely follow the speculative activity
around these flows. At the onset of volatility, these flows can significantly impact the
market near the close. It takes a few days before speculators establish the positioning
and hedging patterns and start anticipating these flows (see here).
Another systematic strategy with predictable flows is levered and inverse exchange
traded products – similar to index options hedging, these products are short gamma
(note that levered/inverse ETF gamma is typically much smaller than index option
gamma). Given that levered and inverse ETFs are short gamma, their rebalancing
results in systematic flows that can be anticipated by speculators, which negatively
affects the performance of these products (see here and here). A recent example is
the demise of the inverse volatility product XIV. When volatility increased in
February, the size of rebalance could not be digested by the market. Liquidity
10
(1-212) 272-1438 16 January 2019
providers, with knowledge of large rebalance flows, were not eager to step in until
the product self-destructed. Figure 5 shows rebalance flow as % of average daily
VIX volume as well as the level of the VIX at which product ‘self-destructed.’ As
soon as the VIX “tagged” this level, volatility quickly subsided.
Figure 5: Rebalance flow for inverse VIX ETPs, as a % of 3M ADV, Figure 6: Difference between the beta of long-short HFs and CTAs to
into the Feb’18 blow-up the VIX
60% 50 30 1
Inverse VIX ETP Rebal % of ADV LS HF Beta over CTA Beta
50% 45
VIX 1M Future Level (Right) 25
40 0.5
40%
Threashold to wipe out inverse VIX
ETPs (Right) 35 20
30%
30 0
20% 15
25
10%
20
10 VIX -0.5
0% 15
-10% 10 5 -1
Jul, 17 Aug, 17 Oct, 17 Nov, 17 Jan, 18 Feb, 18 2011 2013 2014 2015 2016 2018
Source: J.P. Morgan QDS. Source: J.P. Morgan QDS, HFR.
Trend following and volatility targeting strategies are also typically short gamma.
Volatility targeting can be applied to any portfolio (e.g., 60/40, risk parity, factor
portfolio, a platform of fundamental PMs, etc.). Volatility targeting is explicitly short
gamma in a mean-reverting market. The strategy reduces risk when volatility is
rising and increases risk when volatility is falling. This is by design (risk exposure
~1/volatility), and in that way flows from these strategies are closely related to option
hedging. Note that we estimate the notional amount of these strategies at ~$300bn in
mutli-asset portfolios, which is much smaller than the delta weighted put open
interest in Q4 of ~$750bn notional just for the S&P 500 index. In addition, these
strategies sell over several days (unlike option hedges that sell within a day). CTAs’
short gamma exposure is not explicit, but still intuitive as they sell when an asset
price declines, and buy when it goes up (additionally, many CTA strategies volatility
target). Of course, not only systematic investors sell into VIX spikes. Equity long-
short hedge funds also sell into VIX spikes, but perhaps less programmatically and
aggressively. An indication for this is the sensitivity of funds’ beta to the VIX. For
instance, CTAs’ beta to the VIX is about ~4 times higher than equity long short HFs’
beta to the VIX (e.g., -3.5% vs -0.9%). Figure 6 shows the difference between the
beta of equity long-short HFs and CTAs and the VIX. When the VIX increases,
CTAs are quicker in reducing beta (selling stocks) than equity long-short hedge
funds.
The analysis above by no means passes judgment on the merits of various short
gamma systematic strategies that are often used for hedging or risk control. We do
note that these strategies require adjustments due to the changing market
environment (e.g., liquidity-flow-volatility feedback loop, speculative flows, etc.). If
systematic flows are significant enough to impact the market, they will impact their
own performance via speculative flows and market impact.
Which strategies may be impacted – some simple checks would include:

 Strategies where the asset base and flows are large relative to market
liquidity (i.e., crowding).
11
(1-212) 272-1438 16 January 2019
 Strategies where the flows are correlated to volatility. The reason for this is
the volatility-liquidity-flow feedback loop, which makes the effective asset
size ‘appear larger’ than it is. Strategies that are inherently short gamma are
affected more.
 Strategies that are entirely transparent and don’t adjust along the way (e.g.,
if a strategy is documented in a prospectus or academic whitepaper, it will
more likely invite ‘copycats’ or speculative flows).
 In addition to the above, poor performance of a strategy may indicate
crowding or damage from speculative flows or short gamma exposure.
QE/QT and Liquidity

Given the recent collapse in liquidity and the feedback loop of flows-liquidity-
volatility, investors are very attentive to monetary policy measures that may affect
liquidity. The most closely watched metric is the pace of the Fed’s balance sheet
reduction. For instance, a recent example is the negative market reaction on the
comment that balance sheet reduction (QT) will be on autopilot (and positive
reaction when this statement was later modified). Even passing remarks on the
balance sheet can have visible and significantly negative intraday impacts on markets
(e.g., recent remarks that the balance sheet should be substantially smaller).
Why is there such a focus on the Fed’s balance sheet from investors? Adding
liquidity in the form of QE had a positive impact on asset classes over the past
decade. We estimated the impact of QE to be ~20% of equity prices based on
causality tests (see our report here). The questions investors struggle with are how
negative was/will be the impact of the QT. It is plausible that dollar for dollar, QT
has a significantly larger impact than QE. The reason for that may be the above-
explained fragility feedback loop. During QE, both central banks and investors more
broadly buy assets in an environment of low volatility/increased liquidity when the
impact is small, and during QT assets are typically sold while liquidity is removed,
compounding the negative impact of other outflows.
To our knowledge, there is no broadly accepted understanding of the exact

mechanics and magnitude of QT’s impact (e.g., how much it is a signal to the
market, vs. mechanical supply/demand and price impact). There is a significant
relationship between the Fed’s balance sheet changes and the market, but the big
drivers of this relationship are points when the large QE programs were announced
such as March 2009 (e.g., when this point is taken out, the relationship no longer
appears statistically significant; Figure 7 shows the weak contemporaneous
relationship since the start of 2010). Whatever the real mechanical impact is, likely
the impact on market sentiment is much larger (i.e., self-fulfilling impact). In support
of that are recent intraday movements on balance sheet mentions, as well as the price
action of the S&P 500 during Q4 shown in Figure 8. While there may be little or no
mechanical impact on equity prices, most macro traders are not ‘fighting the Fed’ –
when liquidity is added they are buying assets, and when liquidity is removed they
are selling assets. Over the past months, we have heard a large number of anecdotes
where investors avoid buying risky assets during (or actively sell into) weeks when
there is a significant balance sheet reduction (e.g., traders taping the schedule to their
screens, blogs and email chains, etc.).
In this way, balance sheet reductions put significant strain on market sentiment, on
flows and on the weakest link in the market – the liquidity-volatility-flow feedback
loop. If the balance sheet reduction is a signal to sell, volatility increases, liquidity
12
(1-212) 272-1438 16 January 2019
decreases, and additional systematic flows are triggered. Balance sheet driven market
fragility is thus increasing the risk of market disruptions and ultimately the risk of a
recession – which is in contrast to policy makers’ intentions.
Figure 7: Fed weekly balance sheet change (x-axis, $Bn) vs. S&P 500 Figure 8: S&P 500 performance and Fed w/w balance sheet changes
returns (y-axis) was not statistically significant (since 2010) 2900 20000
10% 10000
8% 2800 0
6%
R² = 0.0062 -10000
4% 2700
-20000
2%
0% -30000
2600
-60 -40 -20-2% 0 20 40 60 80 100 -40000
-4% S&P 500 Balance Sheet Chg.
2500 -50000
-6%
-60000
-8%
-10% 2400 -70000
Jan'18 Mar'18 May'18 Jul'18 Sep'18 Nov'18
-12%
Source: J.P. Morgan QDS, Bloomberg.
Source: J.P. Morgan QDS, Bloomberg.
13
(1-212) 272-1438 16 January 2019
Disclosures
This report is a product of the research department's Global Quantitative and Derivatives Strategy group. Views expressed may differ
from the views of the research analysts covering stocks or sectors mentioned in this report. Structured securities, options, futures and
other derivatives are complex instruments, may involve a high degree of risk, and may be appropriate investments only for sophisticated
investors who are capable of understanding and assuming the risks involved. Because of the importance of tax considerations to many
option transactions, the investor considering options should consult with his/her tax advisor as to how taxes affect the outcome of
contemplated option transactions.
Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research
analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document
individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views
expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of
any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views
expressed by the research analyst(s) in this report. For all Korea-based research analysts listed on the front cover, they also certify, as per
KOFIA requirements, that their analysis was made in good faith and that the views reflect their own opinion, without undue influence or
intervention.
Important Disclosures
Company-Specific Disclosures: Important disclosures, including price charts and credit opinion history tables, are available for
compendium reports and all J.P. Morgan–covered companies by visiting https://www.jpmm.com/research/disclosures, calling 1-800-477-
0406, or e-mailing research.disclosure.inquiries@jpmorgan.com with your request. J.P. Morgan’s Strategy, Technical, and Quantitative
Research teams may screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call 1-800-477-
0406 or e-mail research.disclosure.inquiries@jpmorgan.com.
Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe:
J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the
average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve
months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s)
coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of
the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if
applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy
reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a
recommendation or a rating. In our Asia (ex-Australia and ex-India) and U.K. small- and mid-cap equity research, each stock’s expected
total return is compared to the expected total return of a benchmark country market index, not to those analysts’ coverage universe. If it
does not appear in the Important Disclosures section of this report, the certifying analyst’s coverage universe can be found on J.P.
Morgan’s research website, www.jpmorganmarkets.com.
J.P. Morgan Equity Research Ratings Distribution, as of January 02, 2019

Overweight Neutral Underweight
(buy) (hold) (sell)
J.P. Morgan Global Equity Research Coverage 46% 40% 14%
IB clients* 53% 47% 37%
JPMS Equity Research Coverage 44% 41% 15%
IB clients* 75% 65% 56%
*Percentage of investment banking clients in each rating category.
For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold
rating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table
above.
Equity Valuation and Risks: For valuation methodology and risks associated with covered companies or price targets for covered
companies, please see the most recent company-specific research report at http://www.jpmorganmarkets.com, contact the primary analyst
or your J.P. Morgan representative, or email research.disclosure.inquiries@jpmorgan.com. For material information about the proprietary
models used, please see the Summary of Financials in company-specific research reports and the Company Tearsheets, which are
available to download on the company pages of our client website, http://www.jpmorganmarkets.com. This report also sets out within it
the material underlying assumptions used.
14
(1-212) 272-1438 16 January 2019
Equity Analysts' Compensation: The equity research analysts responsible for the preparation of this report receive compensation based
upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues.
Other Disclosures
J.P. Morgan ("JPM") is the global brand name for J.P. Morgan Securities LLC ("JPMS") and its affiliates worldwide. J.P. Morgan Cazenove is a marketing
name for the U.K. investment banking businesses and EMEA cash equities and equity research businesses of JPMorgan Chase & Co. and its subsidiaries.
All research reports made available to clients are simultaneously available on our client website, J.P. Morgan Markets. Not all research content is
redistributed, e-mailed or made available to third-party aggregators. For all research reports available on a particular stock, please contact your sales
representative.
Options related research: If the information contained herein regards options related research, such information is available only to persons who have
received the proper option risk disclosure documents. For a copy of the Option Clearing Corporation's Characteristics and Risks of Standardized Options,
please contact your J.P. Morgan Representative or visit the OCC's website at https://www.theocc.com/components/docs/riskstoc.pdf
Private Bank Clients: Where you are a client of the private banking businesses offered by JPMorgan Chase & Co. and its subsidiaries (“J.P. Morgan
Private Bank”), research is issued to you by J.P. Morgan Private Bank and not by any other division of J.P. Morgan, including but not limited to the J.P.
Morgan corporate and investment bank and its research division.
Legal Entities Disclosures

U.S.: JPMS is a member of NYSE, FINRA, SIPC and the NFA. JPMorgan Chase Bank, N.A. is a member of FDIC. Canada: J.P. Morgan Securities
Canada Inc. is a registered investment dealer, regulated by the Investment Industry Regulatory Organization of Canada and the Ontario Securities
Commission and is the participating member on Canadian exchanges. U.K.: JPMorgan Chase N.A., London Branch, is authorised by the Prudential
Regulation Authority and is subject to regulation by the Financial Conduct Authority and to limited regulation by the Prudential Regulation Authority.
Details about the extent of our regulation by the Prudential Regulation Authority are available from J.P. Morgan on request. J.P. Morgan Securities plc
(JPMS plc) is a member of the London Stock Exchange and is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct
Authority and the Prudential Regulation Authority. Registered in England & Wales No. 2711006. Registered Office 25 Bank Street, London, E14 5JP.
Germany: This material is distributed in Germany by J.P. Morgan Securities plc, Frankfurt Branch which is regulated by the Bundesanstalt für
Finanzdienstleistungsaufsich and also by J.P. Morgan AG (JPM AG) which is a member of the Frankfurt stock exchange and is regulated by the Federal
Financial Supervisory Authority (BaFin), JPM AG is a company incorporated in the Federal Republic of Germany with registered office at Taunustor 1,
60310 Frankfurt am Main, the Federal Republic of Germany. South Africa: J.P. Morgan Equities South Africa Proprietary Limited is a member of the
Johannesburg Securities Exchange and is regulated by the Financial Services Board. Hong Kong: J.P. Morgan Securities (Asia Pacific) Limited (CE
number AAJ321) is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission in Hong Kong and/or J.P. Morgan
Broking (Hong Kong) Limited (CE number AAB027) is regulated by the Securities and Futures Commission in Hong Kong. Korea: This material is issued
and distributed in Korea by or through J.P. Morgan Securities (Far East) Limited, Seoul Branch, which is a member of the Korea Exchange(KRX) and is
regulated by the Financial Services Commission (FSC) and the Financial Supervisory Service (FSS). Australia: J.P. Morgan Securities Australia Limited
(JPMSAL) (ABN 61 003 245 234/AFS Licence No: 238066) is regulated by ASIC and is a Market, Clearing and Settlement Participant of ASX Limited
and CHI-X. Taiwan: J.P. Morgan Securities (Taiwan) Limited is a participant of the Taiwan Stock Exchange (company-type) and regulated by the Taiwan
Securities and Futures Bureau. India: J.P. Morgan India Private Limited (Corporate Identity Number - U67120MH1992FTC068724), having its registered
office at J.P. Morgan Tower, Off. C.S.T. Road, Kalina, Santacruz - East, Mumbai – 400098, is registered with Securities and Exchange Board of India
(SEBI) as a ‘Research Analyst’ having registration number INH000001873. J.P. Morgan India Private Limited is also registered with SEBI as a member of
the National Stock Exchange of India Limited (SEBI Registration Number - INB 230675231/INF 230675231/INE 230675231), the Bombay Stock
Exchange Limited (SEBI Registration Number - INB 010675237/INF 010675237) and as a Merchant Banker (SEBI Registration Number -
MB/INM000002970). Telephone: 91-22-6157 3000, Facsimile: 91-22-6157 3990 and Website: www.jpmipl.com. For non local research reports, this
material is not distributed in India by J.P. Morgan India Private Limited. Thailand: This material is issued and distributed in Thailand by JPMorgan
Securities (Thailand) Ltd., which is a member of the Stock Exchange of Thailand and is regulated by the Ministry of Finance and the Securities and
Exchange Commission and its registered address is 3rd Floor, 20 North Sathorn Road, Silom, Bangrak, Bangkok 10500. Indonesia: PT J.P. Morgan
Sekuritas Indonesia is a member of the Indonesia Stock Exchange and is regulated by the OJK a.k.a. BAPEPAM LK. Philippines: J.P. Morgan Securities
Philippines Inc. is a Trading Participant of the Philippine Stock Exchange and a member of the Securities Clearing Corporation of the Philippines and the
Securities Investor Protection Fund. It is regulated by the Securities and Exchange Commission. Brazil: Banco J.P. Morgan S.A. is regulated by the
Comissao de Valores Mobiliarios (CVM) and by the Central Bank of Brazil. Mexico: J.P. Morgan Casa de Bolsa, S.A. de C.V., J.P. Morgan Grupo
Financiero is a member of the Mexican Stock Exchange and authorized to act as a broker dealer by the National Banking and Securities Exchange
Commission. Singapore: This material is issued and distributed in Singapore by or through J.P. Morgan Securities Singapore Private Limited (JPMSS)
[MCI (P) 099/04/2018 and Co. Reg. No.: 199405335R], which is a member of the Singapore Exchange Securities Trading Limited and/or JPMorgan Chase
Bank, N.A., Singapore branch (JPMCB Singapore) [MCI (P) 046/09/2018], both of which are regulated by the Monetary Authority of Singapore. This
material is issued and distributed in Singapore only to accredited investors, expert investors and institutional investors, as defined in Section 4A of the
Securities and Futures Act, Cap. 289 (SFA). This material is not intended to be issued or distributed to any retail investors or any other investors that do not
fall into the classes of “accredited investors,” “expert investors” or “institutional investors,” as defined under Section 4A of the SFA. Recipients of this
document are to contact JPMSS or JPMCB Singapore in respect of any matters arising from, or in connection with, the document. Japan: JPMorgan
Securities Japan Co., Ltd. and JPMorgan Chase Bank, N.A., Tokyo Branch are regulated by the Financial Services Agency in Japan. Malaysia: This
material is issued and distributed in Malaysia by JPMorgan Securities (Malaysia) Sdn Bhd (18146-X) which is a Participating Organization of Bursa
Malaysia Berhad and a holder of Capital Markets Services License issued by the Securities Commission in Malaysia. Pakistan: J. P. Morgan Pakistan
Broking (Pvt.) Ltd is a member of the Karachi Stock Exchange and regulated by the Securities and Exchange Commission of Pakistan. Saudi Arabia: J.P.
Morgan Saudi Arabia Ltd. is authorized by the Capital Market Authority of the Kingdom of Saudi Arabia (CMA) to carry out dealing as an agent,
arranging, advising and custody, with respect to securities business under licence number 35-07079 and its registered address is at 8th Floor, Al-Faisaliyah
Tower, King Fahad Road, P.O. Box 51907, Riyadh 11553, Kingdom of Saudi Arabia. Dubai: JPMorgan Chase Bank, N.A., Dubai Branch is regulated by
the Dubai Financial Services Authority (DFSA) and its registered address is Dubai International Financial Centre - Building 3, Level 7, PO Box 506551,
Dubai, UAE.
15
(1-212) 272-1438 16 January 2019
Country and Region Specific Disclosures

U.K. and European Economic Area (EEA): Unless specified to the contrary, issued and approved for distribution in the U.K. and the EEA by JPMS plc.
Investment research issued by JPMS plc has been prepared in accordance with JPMS plc's policies for managing conflicts of interest arising as a result of
publication and distribution of investment research. Many European regulators require a firm to establish, implement and maintain such a policy. Further
information about J.P. Morgan's conflict of interest policy and a description of the effective internal organisations and administrative arrangements set up
for the prevention and avoidance of conflicts of interest is set out at the following link https://www.jpmorgan.com/jpmpdf/1320742677360.pdf. This report
has been issued in the U.K. only to persons of a kind described in Article 19 (5), 38, 47 and 49 of the Financial Services and Markets Act 2000 (Financial
Promotion) Order 2005 (all such persons being referred to as "relevant persons"). This document must not be acted on or relied on by persons who are not
relevant persons. Any investment or investment activity to which this document relates is only available to relevant persons and will be engaged in only
with relevant persons. In other EEA countries, the report has been issued to persons regarded as professional investors (or equivalent) in their home
jurisdiction. Australia: This material is issued and distributed by JPMSAL in Australia to "wholesale clients" only. This material does not take into
account the specific investment objectives, financial situation or particular needs of the recipient. The recipient of this material must not distribute it to any
third party or outside Australia without the prior written consent of JPMSAL. For the purposes of this paragraph the term "wholesale client" has the
meaning given in section 761G of the Corporations Act 2001. J.P. Morgan’s research coverage universe spans listed securities across the ASX All
Ordinaries index, securities listed on offshore markets, unlisted issuers and investment products which Research management deem to be relevant to the
investor base from time to time. J.P. Morgan seeks to cover companies of relevance to the domestic and international investor base across all GIC sectors,
as well as across a range of market capitalisation sizes. Germany: This material is distributed in Germany by J.P. Morgan Securities plc, Frankfurt Branch
which is regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht. Hong Kong: The 1% ownership disclosure as of the previous month end
satisfies the requirements under Paragraph 16.5(a) of the Hong Kong Code of Conduct for Persons Licensed by or Registered with the Securities and
Futures Commission. (For research published within the first ten days of the month, the disclosure may be based on the month end data from two months
prior.) J.P. Morgan Broking (Hong Kong) Limited is the liquidity provider/market maker for derivative warrants, callable bull bear contracts and stock
options listed on the Stock Exchange of Hong Kong Limited. An updated list can be found on HKEx website: http://www.hkex.com.hk. Korea: This report
may have been edited or contributed to from time to time by affiliates of J.P. Morgan Securities (Far East) Limited, Seoul Branch. Singapore: As at the
date of this report, JPMSS is a designated market maker for certain structured warrants listed on the Singapore Exchange where the underlying securities
may be the securities discussed in this report. Arising from its role as designated market maker for such structured warrants, JPMSS may conduct hedging
activities in respect of such underlying securities and hold or have an interest in such underlying securities as a result. The updated list of structured
warrants for which JPMSS acts as designated market maker may be found on the website of the Singapore Exchange Limited: http://www.sgx.com. In
addition, JPMSS and/or its affiliates may also have an interest or holding in any of the securities discussed in this report – please see the Important
Disclosures section above. For securities where the holding is 1% or greater, the holding may be found in the Important Disclosures section above. For all
other securities mentioned in this report, JPMSS and/or its affiliates may have a holding of less than 1% in such securities and may trade them in ways
different from those discussed in this report. Employees of JPMSS and/or its affiliates not involved in the preparation of this report may have investments
in the securities (or derivatives of such securities) mentioned in this report and may trade them in ways different from those discussed in this report.
Taiwan: Research relating to equity securities is issued and distributed in Taiwan by J.P. Morgan Securities (Taiwan) Limited, subject to the license scope
and the applicable laws and the regulations in Taiwan. According to Paragraph 2, Article 7-1 of Operational Regulations Governing Securities Firms
Recommending Trades in Securities to Customers (as amended or supplemented) and/or other applicable laws or regulations, please note that the recipient
of this material is not permitted to engage in any activities in connection with the material which may give rise to conflicts of interests, unless otherwise
disclosed in the “Important Disclosures” in this material. India: For private circulation only, not for sale. Pakistan: For private circulation only, not for
sale. New Zealand: This material is issued and distributed by JPMSAL in New Zealand only to persons whose principal business is the investment of
money or who, in the course of and for the purposes of their business, habitually invest money. JPMSAL does not issue or distribute this material to
members of "the public" as determined in accordance with section 3 of the Securities Act 1978. The recipient of this material must not distribute it to any
third party or outside New Zealand without the prior written consent of JPMSAL. Canada: The information contained herein is not, and under no
circumstances is to be construed as, a prospectus, an advertisement, a public offering, an offer to sell securities described herein, or solicitation of an offer
to buy securities described herein, in Canada or any province or territory thereof. Any offer or sale of the securities described herein in Canada will be
made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly
registered under applicable securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or
territory of Canada in which such offer or sale is made. The information contained herein is under no circumstances to be construed as investment advice in
any province or territory of Canada and is not tailored to the needs of the recipient. To the extent that the information contained herein references securities
of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities must be conducted
through a dealer registered in Canada. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed judgment
upon these materials, the information contained herein or the merits of the securities described herein, and any representation to the contrary is an offence.
Dubai: This report has been issued to persons regarded as professional clients as defined under the DFSA rules. Brazil: Ombudsman J.P. Morgan: 0800-
7700847 / ouvidoria.jp.morgan@jpmorgan.com.
General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co.
or its affiliates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to
JPMS and/or its affiliates and the analyst's involvement with the issuer that is the subject of the research. All pricing is indicative as of the close of market
for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change
without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any
financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not
intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own
independent decisions regarding any securities or financial instruments mentioned herein. JPMS distributes in the U.S. research published by non-U.S.
affiliates and accepts responsibility for its contents. Periodic updates may be provided on companies/industries based on company specific developments or
announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P.
Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise.
"Other Disclosures" last revised January 01, 2019.
16
(1-212) 272-1438 16 January 2019
Copyright 2019 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or
redistributed without the written consent of J.P. Morgan. #$J&098$#*P
10
Completed 16 Jan 2019 12:12 PM EST Disseminated 16 Jan 2019 12:13 PM EST
17
03 January 2019

Commentary
December Post-Mortem, Signals from Fund Flows,
Role of Systematic Flows and Reversion
December Post-Mortem Global Quantitative and

Over the past month, the confidence of equity investors virtually collapsed. The AC
month of December proved us wrong in the view that the market would rise into Marko Kolanovic, PhD
year-end and in 2018 overall. Our call for a year-end recovery was based on near- (1-212) 272-1438
record low equity positioning (HFs and systematic investors), near five-year low
in valuations (forward P/E and PEG), positive seasonality, and two positive Bram Kaplan, CFA
(1-212) 272-1215
catalysts (G20 and the Fed’s dovish pivot). All of this was “too little, too late”
bram.kaplan@jpmorgan.com
amid the liquidity collapse, retail investors fleeing the market, weakening J.P. Morgan Securities LLC
fundamentals, and more uncertainty coming from Washington. Continued signs of
economic slowdown reinforced investors’ fears that a recession is around the
corner, which is not our house view. In 2017, we published a report about the
potential onset of a liquidity crisis in 2018 that could evolve at the back of QT,
rising rates and volatility, systematic selling, a collapse in market liquidity, and
social and political tensions (here). We highlighted the scenario during the summer
as well, but given the solid Q3 GDP, strong corporate earnings, and record
consumer activity, we did not think a significant liquidity crisis scenario would
play out on such short notice in Q4 2018. Q4 turmoil appeared amid selling from
systematic and discretionary hedge funds, the largest fund outflows since 2008,
and an unprecedented collapse in market liquidity. Despite being wrong on the
overall market direction, we had several correct predictions in 2018: we forecasted
volatility and tail risk to rise, accurately predicted local market bottoms on Feb 9,
May 1, and October 30, argued for EM-DM convergence, and pointed to US
administration policies and the Fed as the key risks (here, here).
Following the selling from systematic investors in mid October and hedge fund
deleveraging in late October, positioning was lightened significantly. Indeed,
during November, flows stabilized and the market managed to produce a small
positive return. It seemed briefly that the G20 and Powell’s speech would be
sufficient to prod the market into a December rally. Instead, already fragile
sentiment was undermined by political uncertainty from the US administration, the
December FOMC meeting, a slowdown in economic data, and a viciously negative
news and social media cycle. These developments brought a large amount of
selling from mutual fund investors in an environment of poor liquidity. Figure 1
shows monthly fund flows (mutual funds and ETFs), which in December posted
the largest outflows since 2008. A complete disaster was averted by fixed-weight
portfolio rebalances (e.g., pension funds) that were buying a significant amount of
stocks during the last week of the year. Figure 2 shows model equity flows for
fixed-weight portfolios (% of equity assets, left axis). In these charts, one can see
that both retail outflows and pension inflows were among the largest in history
(only 2008 and 1987 saw larger flows). The impact of these flows was exacerbated
by the collapse in liquidity (dashed lines on right axis shows the equivalent % fund
flow, when adjusted for prevailing market liquidity). We believe that these flows
and the volatility they unleased were significant drivers of the poor price action in
December.

18
(1-212) 272-1438 03 January 2019
What can these flows signal for future returns?

Retail flows are generally considered to be a contrarian market indicator. More often
than not, retail investors tend to buy at times of exuberance and sell at times of panic.
Figure 1 (inset table) shows market performance after significant fund
inflows/outflows, and one can see that buying after large mutual fund outflows was
historically profitable. On the other hand, institutional fixed-weight portfolios (e.g.,
pension funds) tend to have a better track record of market timing. While fixed
weight portfolios generally underperformed risk-based allocations (e.g., risk parity)
on a Sharpe ratio basis (see here), these portfolios were historically buying at roughly
the right time. Figure 2 shows that a similar magnitude of pension buying occurred
only toward the end of 1998, 2002, 2008, and 2011—near the cyclical market
bottoms. This indicates that for unlevered investors, and those with less sensitivity to
MTM volatility, pension fund buying is likely a positive market signal. Indeed,
Figure 2 (inset table) shows that buying after pension fund inflows was historically
profitable. In summary, both mutual fund and pension flows suggest positive market
performance in the future. That said, we do recognize that the risk of a negative
feedback loop (e.g., wealth effect of declining stock market) has increased
meaningfully since December.
Figure 1: Monthly fund flows as % of AUM un-adjusted (solid line) Figure 2: Estimated fixed asset allocation pension equity rebalance
and adjusted for prevailing liquidity (dashed line) flows
1.5% 8% 40%
Mutual Fund and ETF Flows 4% Perf. After 1M 2M 3M 6M
1.0% Inflow>1% 1.6% 3.2% 3.4% 7.2%
6% Outflow>1% 0.5% 1.3% 2.2% 5.3% 30%
0.5% 2%
0.0% 0% 4% 20%
-0.5% -2% 2% 10%

-1.0%
-4%
-1.5% 0% 0%
-6%
-2.0%
Perf. After 1M 2M 3M 6M -2% -10%
-2.5% Inflow>0.25% -0.7% -1.0% -0.5% 0.2% -8%
Outflow>0.25% 0.3% 2.0% 2.7% 6.0% Pension Fund Flows
-4% -20%
-3.0% -10%
1981 1985 1990 1994 1999 2003 2008 2012 2017
2005 2006 2008 2010 2012 2013 2015 2017 2019
Source: J.P. Morgan QDS, EPFR. Source: J.P. Morgan QDS.
Role of Systematic Flows, Liquidity, and Lack of Reversion

A lot has been written and argued about the role of systematic investors in the
market. Many discussions on how important systematic flows are for the market
involve some level of misunderstanding (telephone game) between analysts, the
press, and quantitative and fundamental managers. Here we would like to summarize
our views on the role of systematic flows and liquidity.
When we analyze systematic flows, we track a number of different market segments:

the insurance industry, derivatives hedging and market making programs,
quantitative asset managers, passive indexers, liquidity provision strategies, etc.
Furthermore, quantitative asset managers (as one of several market segments) run
strategies that can be vastly different from each other. For instance, low-frequency
quant strategies come in different types: equity long-short quant (here), futures-based
and trend following (here), risk budgeting/portfolio construction (here), and big data
19
(1-212) 272-1438 03 January 2019
and machine learning (here) (our primers for each of these types is provided in the
links). In addition, there are high-frequency strategies, many of them related to
liquidity provision, short-term arbitrage of indices, co-movement of stocks, etc. For
these reasons, it would be wrong to classify all these vastly different parts of the
industry and related flows under one term such as “quants,” “algos,” “machines,”
etc., and collectively blame them for certain positive or negative market effects.
There were market crises and rapid sell-offs happening long before the proliferation
of systematic strategies, derivatives, and electronic trading. For instance, we find that
correlation between volatility and mean reversion, which is today largely driven by
option hedging, was present long time before options were invented (e.g., in the
1930s). At that time it was a result of “stop-loss” trading; the invention of options
just provided a product that enabled a more flexible stop-loss strategy (here).
Similarly, many other systematic strategies do what discretionary investors have
done for decades. For instance, the century old saying “cut your losses short and let
your profits run” has found application in CTAs, equity long-short factors, and even
risk-based portfolio approaches such as volatility targeting. “Don’t put all your eggs
in one basket” found its application in risk parity, multi-factor models, etc.
While it is incorrect to say that systematic flows are the sole driver of recent market
moves, it would be equally incorrect to say that systematic flows don’t have a
meaningful impact. This has now been broadly accepted, and many analysts are
forecasting various systematic flows (with various degrees of accuracy).
Collectively, flows from strategies such as CTAs, volatility targeting, option
hedging, passive rebalances, CPPI structures, etc. can represent a large part of market
flows and may appear as an unknown force to some fundamental investors. Perhaps
even more than flows from systematic strategies, the marketplace has been impacted
by changes in the structure of market liquidity (as provided by electronic market
makers). Similar to systematic strategies, liquidity has become to a large extent
driven by market volatility, thus reinforcing a negative feedback loop between
volatility and liquidity. The most recent examples include an unprecedented drop in
futures market depth (alongside an increase of the VIX, Figure 3), currency flash
crash on Jan 2, or the equity market “upside crash” on December 26. Equity markets
could benefit from a rethinking of the current state of liquidity provision and of
market reversion forces. The depletion of market reversion forces was driven by a
decline of value investors (as money moved to passive and systematic strategies), a
shift of assets from public to private equity (private equity has a more favorable mark
to market treatment, thus creating arbitrage between public and private equity), and a
reduction of human risk taking activity after the 2008 crisis (e.g., block traders, prop
desks, etc.).
20
(1-212) 272-1438 03 January 2019
Figure 3: Liquidity is strongly negatively correlated with volatility

Monthly average # of ES futures contracts within 1 index point of the top of the order book
10,000 0
5
8,000
10
6,000 15
20
4,000 25
30
2,000
35
0 40
2008 2010 2012 2014 2016 2018
Emini Market Depth (Left) VIX (Right, inverse scale)
Source: J.P. Morgan QDS.
21

Kolanovic

Uploaded by

Copyright:

Available Formats

Kolanovic

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Kolanovic

Uploaded by

Copyright:

Available Formats

Table of Contents

Rpt. 66454994 MARKET AND VOLATILITY COMMENTARY : DECEMBER POST-MORTEM, SIGNA 18 - 25

These reports were compiled using a product of Thomson Reuters www.thomsonreuters.com

Market and Volatility

The V-shaped recovery and Positioning Global Quantitative and

no longer considered outlandish by most. Calls from various strategists for

See page 3 for analyst certification and important disclosures.

In terms of flows, liquidity and volatility, there is a parallel between the

Commodity Sector Trades

J.P. Morgan Equity Research Ratings Distribution, as of January 02, 2019

Legal Entities Disclosures

Country and Region Specific Disclosures

"Other Disclosures" last revised January 19, 2019.

Market and Volatility

Narrative vs. Flows Global Quantitative and

See page 7 for analyst certification and important disclosures.

Liquidity-Volatility-Flows Feedback Loop

7000 S&P 500 Futures Depth vs VIX

Which strategies may be impacted – some simple checks would include:

QE/QT and Liquidity

To our knowledge, there is no broadly accepted understanding of the exact

J.P. Morgan Equity Research Ratings Distribution, as of January 02, 2019

Legal Entities Disclosures

Country and Region Specific Disclosures

"Other Disclosures" last revised January 01, 2019.

Market and Volatility

December Post-Mortem Global Quantitative and

See page 5 for analyst certification and important disclosures.

What can these flows signal for future returns?

-0.5% -2% 2% 10%

Source: J.P. Morgan QDS, EPFR. Source: J.P. Morgan QDS.

Role of Systematic Flows, Liquidity, and Lack of Reversion

When we analyze systematic flows, we track a number of different market segments:

Figure 3: Liquidity is strongly negatively correlated with volatility

You might also like