Less than 24 hours ago we presented the latest reason by JPM’s Mislav Matejka explaining why the equity strategist refuses to buy this market, to wit: “equities are down ytd, but notably the ’16 P/E is not much cheaper today than it was at the start of the year. In fact, for the US, the P/E multiple is currently higher than it was on 1st January, at 16.8x vs 16.6x then.”

Fast forward to today when we read something rather stunning: in a dramatic conversion, after moving to Netural on equities just a month ago, JPM is as of this moment underweight equities “for the first time this cycle.” Additionally, JPM is also Underweight such highly correlated to stocks (and China) commodities as gas, oil, and copper, but in a surprising reversal is now, perhaps most importantly,overweight gold.

The details from JPM’s Jan Loeys:

Equities, credit and commodities have all rallied in the last three weeks, as some of the immediate threats to the world economy have faded from attention, possibly only because the bad earnings season has wound up. But, to us, the fundamentals of growth, earnings and recession risk have not improved, and if anything have worsened. We remain wary of the near-empty ammo box of policy makers.

Our 12-month-out US recession odds have risen to 1/3, while equity-implied odds have instead fallen to near 1/5. But even with no recession this year or next, we see US earnings rising only slowly by low single digits and see little to boost multiples. The eventual recession should bring US stocks down some 30%, creating a strong downward risk skew to returns over the next few years.

How to trade’s JPM’s new reco: “We use the rally in stocks to sell it and go underweight stocks, versus HG corporate bonds and cash. The strong rebound of the past few weeks does create near-term momentum, and thus keeps our first UW small. Low growth and easy money and the reduced potential for capital gains should raise the demand for income. We focus this on US HG given its still over 4% yield, a rarity in the HG world. We are not ready to pursue FX or commodity carry at this point, but like high-dividend stocks. Within fixed income, we are now long duration.”

But most stunning is that in the overall asset allocation we spot the following (bolded and underlined):

Our portfolio is now 5% UW Equities, the first UW this cycle. We retain a 10% OW of Credit, moving Bonds to Neutral, and Cash to OW. Commodities stay UW, but we move it to a small -1%, given recent momentum and volatility. Within Equities, be OW defensive sectors. Given that our risk focus is now switching from Chinese debt to US corporate caution, we go OW EM equities. In Credit, OW US HG, US banks, and sterling HG against EUR and EM. In Commodities, be short gas oil and base metals but OW gold.