JPMorgan provides 5 charts that suggest the stock market still has 'plenty of room' to rise from current levels

AP/Mark Lennihan

• Stocks still have plenty of room to rise from current levels, according to a note published by JPMorgan on Friday.
• The bank largely pointed to investors' underweight equity positioning as a main driver for stocks to move higher over the medium to longer term, despite near-term risks of elevated momentum.
• Investors' allocation to stocks is 40%, which is below historical averages and is well below the early 2018 high of 49%. 
• With bonds yielding next to nothing, investors may return to stocks and drive up prices as fears over the coronavirus pandemic subside.
• Here are the five charts JPMorgan pointed to in support of its bullish view on stocks.
• Visit Business Insider's homepage for more stories.

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Stocks still have "plenty of room" to rise further from current levels after a nearly 40% rally off the lows, according to a note published by JPMorgan on Friday.

The bank acknowledged that short-term risks are present, especially with elevated momentum positioning by traders, which signals overbought levels.

But over the medium to longer term, JPMorgan said it thinks stocks are the place to be.

The short-term overbought condition is "not enough by itself to stop or derail a bull market underpinned by four medium to longer term drivers," the bank said.

Those four drivers include a still-low overall equity positioning backdrop; a rapid healing of funding markets; a structural change in the liquidity and interest rate environment; and a rapid economic recovery driven by steady lockdown relaxation.

Read more: 'Embrace the coming crash': A notorious market bear who called the dot-com bust warns big tech stocks are on the verge of succumbing to the economy's downturn

Part of JPMorgan's argument is similar to a recent note from Bank of America, which pointed to a potential "Great Rotation" by investors from bonds into stocks.

Despite the nearly 40% rally in stocks since the March 23 low, investors' stock allocation "isn't much different from last March's backdrop as the rise in cash holdings and the expansion of the value of the bond universe partly offset the equity rally," the bank said.

JPMorgan said it thinks investors will increase their allocation to stocks given the favorable backdrop of high liquidity and low interest rates.

Here are the five charts JPMorgan used to expand on its reasoning for being bullish on stocks.

Read more: BANK OF AMERICA: Buy these 13 under-the-radar tech stocks poised to outperform amid flaring China tensions and lasting pandemic damage

1. Short interest remains elevated

JPMorgan

This chart is a short interest proxy of the S&P 500 index. It shows that bearish traders still have elevated short bets on the market. As the market grinds higher, the bank expects shorts to cut their losses and close out their short positions, which would creating buying pressure in stocks.

2. Investors are underweight stocks

JPMorgan

Non-bank investors currently have a 40% allocation to equities, which is below its historical average and below its 2018 high of 49%.

The chart shows that there is plenty of room to move higher for investors' allocations to stocks.

JPMorgan believes equilty allocations are likely to increase over the next few years thanks to low interest rates and high liquidity. 

Investor fear surrounding the coronavirus pandemic would likely help improve equity positioning as well.

Read more: Famed economist David Rosenberg says investors are falling into a classic market trap that's historically preceded a further meltdown — and warns 'there's not going to be much of a recovery'

3.Investors are overweight bonds

JPMorgan

On the flip side of investors' low equity positioning, is their current allocation to bonds.

Investors rushed into bonds amid the coronavirus pandemic, pushing the bond allocation to 24%, well above its historical average of 19%. 

As investor fear over the virus subsides, and investors wake up to the near-zero interest rates they're receiving with their fixed income holdings, it is very possible that they will rotate into stocks, according to JPMorgan.

See the rest of the story at Business Insider

See Also:

• MORGAN STANLEY: Buy these 23 high-growth stocks that look poised to deliver market-beating returns over the long term
• GOLDMAN SACHS: Buy these 25 stocks that are wildly popular with hedge funds — and have crushed the market this year
• Jefferies breaks down the top 22 stocks it thinks you should buy right now — including 6 fast-risers that just captured its attention

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