CHART OF THE DAY: Why There's A 97% Chance Of A Big Market Rally

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Despite last week’s rally, investors remain in deep panic.

That’s the message from Citi strategist Tobias Levkovitch, who has updated his proprietary Panic/Euphoria model, which blends 9 indicators of investor sentiment.

He writes:

Indeed, the model fell into “panic” territory a week ago and continued to be in panic this week despite the market’s rally (see Figure 1), which statistically argues that there is a roughly 90% probability share prices are higher in six months and a 97% chance of gains in 12 months. On average, stocks appreciate 8.9% in six months and about 17.3% in a year when reviewing data looking back about 25 years versus random outcomes of market gains in the 75% range of likelihoods when studying the same time period. Note that this proprietary metric fell into panic late in 2008 and again in the summertime last year both in front of healthy market moves to the upside. Conversely, it surged into euphoria in both 2007 and 2008, implying forward equity market weakness as well.

chart of the day, panic/euphoria model, july 2011

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