Global financial markets got rocked this week after Federal Reserve Chairman Ben Bernanke suggested that he could begin to taper, or gradual reduce, the Fed’s stimulative quantitative easing program.
Among other things, the CBOE volatility index — aka the VIX, aka the “fear index” — spiked above the 20 level for the first time in months.
For the contrarians, a high level of fear in the stock markets suggests that it’s time to buy.
But not so fast, says Citi’s Tobias Levkovich.
“Investors may be encouraged by a VIX reading above 20 but they shouldn’t be,” he warns in a new note to clients. “Factors such as tapering, international economic disappointments and challenges for a quicker anticipated equity market leadership shift into global cyclicals suggest that the environment may not be that conducive for a new rally effort quite yet.”
Levkovich currently expects the S&P 500 to end the year at 1,615.
“The longer term Raging Bull Thesis remains unchanged but 2H13 earnings estimates may need to be trimmed before stocks can rebound,” he added. “Sentiment is not set up for a big turn now and there is earnings estimate risk that plausibly restrains near-term enthusiasm. Further dislocation is possible with downside risk in the 1,550 area.”
“[H]istory argues for caution with below random outcomes,” he added.
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