If one of Wall Street’s most accurate forecasters is right, the stock market will fall at least another three percent this month before finding its footing.
Just two days before the S&P 500 Index and Nasdaq Composite dropped by about two percent each, Marko Kolanovic, JPMorgan’s Global Head of Derivatives and Quantitative Research, warned investors in a research note that stocks were on the verge of breaking out of a ‘dead zone’—and volatility was about to surge.
Now that stocks have seen the worst sell-off in months, the analyst’s warning appears prescient.
“We expect definitely an increase in volatility in September—more likely than not a sell-off as well,” Marko Kolanovic told CNBC’s “Fast Money” in an interview this week. “It would be triggered by high volatility, deleveraging from various systematic strategies and some of these options effects that are going in reverse.”
The CBOE Volatility Index is now at its highest level in more than two months.
“If you look at the S&P price action over the past two months, it’s been in an extremely tight range. Actually, it’s one of the longest periods of the market really not moving at all,” he said.
However, that all changed on Friday, when the S&P saw its largest move since June. It came as the Dow Jones Industrial Average saw its first triple point loss since July 5.
Kolanovic, who early this year correctly told “Fast Money” viewers that both gold and crude oil would rebound, does not believe the Federal Reserve will raise interest rates at its September meeting.
Yet, given the uncertainty surrounding that meeting as well as the presidential election, it has the capacity to drive volatility above seasonal levels and contribute to more downward pressure on stocks. By the end of the year, Kolanovic believes the market will move higher.
“December tends to be the strongest month,” noted Kolanvic. “Once the election is out of the way, it could provide some certainty and some boost to the market.”