Photo: Flickr/Jo Naylor
Tobias Levkovich, Citi’s top U.S. equity strategist says there are many indicators, both short and intermediate, that show that markets are “poised to rally this summer into the fall” despite concerns over Europe, slowing global growth, U.S. elections, and the fiscal cliff.Citigroup’s proprietary Panic-Euphoria model which successfully predicted a 98 per cent chance of a double-digit return in stocks last October, is in panic mode again which signals a strong probability of gains over the next six and 12 months.
More specifically, this time around the sentiment indicator is predicting a 97 per cent chance of gains by the end of the year, up from 96 per cent in May.
But that isn’t the only sign.
Interestingly, the intra-stock correlation between large caps has also increased showing that investors have decided that macro events move all stocks rather than consider their balance sheets, earning growth etc. “When this development was seen in the past, it was a sign of capitulation and stock indices began to change direction,” according to Levkovich.
Finally, the Global Citi Economic Surprise Index which is highly correlated to the S&P 500 has fallen to “trough-like numbers” and a turnaround seems very likely. Levkovich recommends “stepping into recent weakness and buying stocks as a positive inflection in the global CESI seems imminent.”
The one big risk besides Europe, China and the U.S. fiscal cliff is that earnings estimates for the second half of the year have been too high.