'BUY THE DIP': This indicator says the risk of a major bear market for US stocks remains low

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  • The US S&P 500 and Nasdaq stock indexes both fell into bear markets late last year, defined as a drop of 20% from peak to trough.
  • Stocks have rallied hard in recent days, leading many to ask whether now represents a buying opportunity or simply a short-term correction in a longer-lasting downturn.
  • Citi’s Bear Market Checklist suggests that investors should be “buying the dip”.

US stocks have fallen sharply in recent months, even with a strong rebound in early 2019.

Many investors are now asking themselves whether this represents a buying opportunity, or whether the recent slide — seeing the S&P 500 and Nasdaq both fall into a technical bear market — is simply the start of a bigger decline to come?

While no one can say with any certainty as to what lies ahead, based on Citibank’s Bear Market Checklist, the latest pullback appears to be an opportunity for investors to pile in.

“Our Bear Market Checklist helps us compare current global market variables to those before previous major bear markets,” Citi says.

“Right now, only 3.5/18 factors are flashing sell compared to 17.5/18 in 2000 and 13/18 in 2007.”

The current checklist is shown below, comparing the result to what was seen when US stocks began the latest selloff in late October last year and what was flashing red when the last two major bear markets occurred back in 2007 and, before that, the tech-wreck of 2000.

Citi

Given the lack of red and yellow shading seen right now, the indicator is telling Citi to buy, not sell.

“It is not a market-timing model,” Citi says.

“It will not tell us that another short-term correction is imminent, but it will tell us what to do when that correction occurs.

“It is telling us to buy this latest dip.”

While the vast majority of variables point to the coast being clear for investors to pile in, Citi says there are some areas to keep a close eye on, noting that a flattening in the US yield curve and rising credit spreads “are of particular concern”.

Helping to offset the signal being generated by the yield curve, a noted recession predictor in the past, Citi says that “equity valuations do not look stretched and the equity risk premium is still quite high”. It adds that “corporate activity is not excessive and fund inflows have never picked up strongly”.

From a historic perspective, the bank says red flags have “accumulated gradually before rising exponentially” in the last year of the bull market.

Given that’s not been seen at present, Citi says it will become “more worried when 7-8 factors are flagging caution”.

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