CITI: Buy the dip

There’s an old investor’s cliche: “buy the dip.” Basically when everyone sells but nothing seems seriously wrong with the markets, buy up assets and wait for the bounce back.

The only problem is when that dip deteriorates into a bear market or something worse.

So you can forgive analysts for being worried about the current market sell-off, especially as fear of recessions, low oil prices, and slowing global demand all hang over the market.

But according to Robert Buckland and the global strategy team at Citi, based on their checklist of 18 market factors, sticking to the old wisdom is the way to go.

“Our current checklist count is 5/18, which suggests to us that it is still right to buy this latest dip, just as it was last August,” wrote Buckland in a note to clients. “Maybe the post-2009 global bull market is stalling in line with stalling EPS, but our checklist suggests that it is still too early to call the next major bear market.”

Buckland’s 18-point checklist includes everything from trailing price-to-earnings ratio, global capital expenditure growth, and a variety of factors to help signal the coming of a serious downturn.

In 2000 and 2007, before the start of the last two recessions, the checklist had 17.5 and 13 factors respectively saying it was time to sell right at the peak. Today only 5 of the 18 are saying sell.

Currently the sell signs are: mergers as a per cent of market cap, net debt to EBITDA ratio, US high yield bond spread, US investment grade bond spread. The fifth is because global return on equity and global earnings per share growth are in “yellow” territory, counting for a half each.

This means that the current downturn is more along the lines of 20% corrections in 1987, 1998, and 2011. In all three of those instances the number of sell signals were lower and the market increased at least 13% in the 12 months after the market hit bear territory.

Buckland also highlighted one key factor that set the 2 types of sell-offs apart.

“The genuine bear markets were all accompanied by 30%+ collapses in global EPS,” he wrote. “The corrections to be bought might have seen EPS fall, but by no more than 12%. Right now, global EPS are down by 6%. According to history, to make this market a sell, then EPS would have to fall a lot more.”

There are of course weak spots to the checklist, said Buckland, but it seems that now is the right time to get into the market.

Simply put, buy stocks.

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