Why the S&P 500 is poised to gain 3% over the next 20 days, says JPMorgan's trading desk

• A tactical buy signal just flashed in the stock market, according to JPMorgan's trading desk.
• The bullish signal suggests that the S&P 500 could surge 3% within the next 20 days.
• "This is very similar to what we saw in late Aug when the S&P bounced just over 3%," JPMorgan said.

A tactical buy signal just flashed in the stock market, according to a Tuesday note from JPMorgan's trading desk.

The buy signal suggests that the S&P 500 could jump 3% within the next 20 days, which would put the index within spitting distance of its all-time high.

JPMorgan's Tactical Positioning Monitor measures positioning data within the stock market, and it flashes buy signals when either short-term positioning falls significantly and swiftly, or when positioning is rising while the stock market is still below its recent peak.

JPMorgan's tactical buy signals have a proven track record, with the strategy generating an 8.9% annual return with a 69% per trade win ratio from 2015 to 2021. What's more, the buy signals' tendency to generate a 3% return over the following 20 days is triple the 1% gain that has occurred during all other time periods, according to the bank.

The most recent buy signal was flashed after positioning data showed a sharp decline amid this month's 5% sell-off in the broader stock market. 

"Our US Tactical Positioning Monitor just hit our threshold for an attractive set-up for the S&P 500, based on the fact that it dipped to -1.5z over the past 4 weeks," JPMorgan said. "The last time we hit this level was in late Oct '23, although the current set-up seems more akin to where things stood near the late Aug '23 lows, when an attractive set-up was also triggered."

But a bullish buy signal isn't enough to push the stock market higher on its own, JPMorgan's trading desk admitted. 

Instead, for this most recent buy signal to be successful, corporate first-quarter earnings will have to deliver and geopolitical tensions will have to cool down.

"To state the rather obvious point, whether we sustain the bounce we've seen at the start of this week will most likely depend on earnings and a lack of growth / geopolitical scares. However, following the recent sell-off and positioning reductions, a rebound seems more possible if they hold up," JPMorgan said.