J.P. Morgan's Jason Hunter believes stocks are overbought, but he's telling investors not to sell.
The firm's head of global fixed income and U.S. equity technical strategy believes the end isn't near for the historic rally partly because investors aren't done repositioning following this summer's recession scare.
"We have a bullish view on the S&P going into the early part of next year at least," he told CNBC's "Trading Nation" on Tuesday. "You're going to see further rotation away from defensives."
Hunter bases his case on an S&P 500 daily time-frequency chart that also shows relative strength.
"You do have overbought momentum right now after a prolonged period of sideways price action," said Hunter. "Typically, what you tend to see is momentum will peak before the price trend actually does."
Even though he is already detecting "peak momentum," Hunter suggests it's not time to worry yet because there's panic buying. It's a dynamic that's often seen in late-stage bull markets, according to Hunter.
"As long as you're above this 3,020 area, and even we take a step back and say the 2,940 – 2,950 area, we'd say this trend is firmly intact with no signs of slowing," he added.
He also uses a chart of the 10-year Treasury Note yield to further back up his point. Hunter sees it providing valuable clarity into whether global manufacturing is bottoming, which is key to the stock market's next leg higher.
"Ten-year yields both in the U.S. and globally tend to just track global manufacturing PMI [Purchasing Managers' Index] over time. And, as you saw in 2012 and again in 2016, if we had an overlay of the PMI on top of this, it would look very similar," he said. "We think a similar pattern is unfolding in the yield chart and on the PMI data, in general."
Stocks saw a volatile day on Tuesday. The major indexes hit all-time highs, but only the tech-heavy Nasdaq closed in record territory. The Dow and S&P 500 broke multiday win streaks. The S&P closed at 3,120, 7 points off its record high.
"Our base-case view is roughly 3,200 for the first half of next year, and it's sort of a vague target in terms of timing," Hunter said. "A lot of this depends when is a trade deal signed [and] when do you fully see the position squeeze in defensives. We think that defensive squeeze alone could take the S&P to 3,200."