If you’d asked me yesterday, I’d have said the odds favored a retest of the stock market lows after oil turned negative and profit takers started selling outperforming tech stocks . But after today’s rally, I’m not so sure.
The Dow Jones Industrial Average gained 456.94 points, or 2%, while the S&P 500 has rose 2.3%, and the Nasdaq Composite climbed 2.8%. Oil rose , too, earnings are getting released, and it is almost as if life is normal.
Which raises the question of all questions: Is the bear market over ? A look at earnings and economic data suggests it’s not. The continued Fed stimulus and fiscal aid suggest perhaps not. Flip a coin and your guess would probably be as good as mine. Citigroup tries to have it both ways.
Pondering that question, Citigroup strategist Robert Buckland comes up with what seems like an unequivocal answer: “Not yet.” That’s largely because the stock market usually falls as much as earnings, which means the MSCI World index should have fallen as much as 50% from top to bottom when all is said and down. Its drop was just 34%.
Yet, central banks have never responded as quickly to a recession as they are now. That’s created a “giant bid/offer battle” between bulls, who are betting on the Fed, and bears, who are betting on the earnings collapse. “For now, the central bank bid is driving equity markets up, but we suspect the collapse in profits cannot be completely ignored,” Buckland writes.
Still, Buckland recommends investors “buy the dip.” That’s because Citi’s Bear Market Checklist currently says so. The checklist, he warns, is not a timing tool, but a measure of how frothy the market was at the previous peak. “What matters right now is not its latest reading, but the 5.5 [out of] 18 red flags at the top of the market in February,” he explains. “The BMC has already made its call about this sell-off. It wants to buy the dip because it didn’t see much froth to be cleared out.”
That may come as a surprise to many who saw nothing but froth back in February. But then again, it’s not a call to buy stocks now...just to be ready to.
