The end of short covering and 'Fed put' spells market trouble

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Two important trends that have helped propel the stock market are coming to an end, posing significant challenges for investors, according to Wall Street experts.

One is a near-term pattern — namely the rush to cover short positions that has driven the more than 13 percent off its Feb. 11 intraday low. JPMorgan Chase's models show that short covering is running out of gas.

The other is longer term — namely the oft-cited "Fed put," or the backstop traders believe has come from the U.S. central bank's easy monetary policy. Strategists at Bank of America Merrill Lynch see a pattern in which the riskiest stocks that benefit the most from Fed policy are now underperforming their higher-quality peers.

Both JPMorgan and BofAML agree on one element of strategy: The shift should be on from momentum to value stocks as the rally stumbles. Major averages were down nearly 1 percent across the board in Thursday trading.

"We think this recovery has been largely driven by fundamentally insensitive strategies and broad-based short covering," Dubravko Lakos-Bujas, JPMorgan's head of U.S. equity strategy, and others said in a note to clients. Models the firm uses to monitor market trends imply "little room left for further short covering" while trend followers "have covered most of their shorts and are currently close to being neutral equities."