Green and Archimedes:
Are you two going shorter now?
Pulse Monitor:
citigroupgeo.com
Morning Musings: Power of Panic
citigroupgeo.com
The Power of Panic
? Investor sentiment remains a crucial facet for equity market direction. Our
proprietary Panic/Euphoria Model remains in panic territory. Yet, it is above
extreme readings experienced earlier in the year, which historically have prefaced
a high probability of impressive stock gains in the subsequent six and 12 months.
The 25% jump in the S&P 500 is likely to generate some renewed confidence (and
more than $1.5 trillion in wealth), but it appears that further gains are plausible.
? Skepticism in the rally remains firmly in place. Given challenging economic
times, awful earnings reports and data that is far from encouraging, not to mention
defensively positioned portfolios in February, there is a fair amount of disbelief in
the move and doubt about its sustainability. Anecdotally, most investors appear to
think that they have missed their opportunity and will wait for a chance to buy in
at lower levels, which argues that the “pain trade” is for more upside.
? Mutual fund indicators are supportive of further stock index gains. The proverbial
cash on the sidelines argument is accurate, but fund managers also are sitting on
more cash than they have historically. Moreover, equities have declined to less
than 50% of financial assets held by households, suggesting that any desire to
lower equity exposure already has occurred unfortunately and some increase is
more likely just to return to the average.
? Consensus 2H09 market recovery view could have some flaws. Many investors had
argued earlier this year that there was time to buy stocks and one should look for
more evidence of economic recovery. Moreover, it was presumed that credit
conditions would lead, even as our work showed that credit and equities move in
tandem. Additionally, the 2H09 stock market rebound had become the general
consensus view. From our perch, there actually may be more challenges in the
second half of the year, if the hope for recovery does not materialize as expected
but that the “coiled Spring bounce“ could continue until around mid-year.
? Capital Goods starting to look more interesting as de-stocking could ease soon.
Given some opportunity for the ISM to improve from deeply depressed levels and
the close relation between Materials and Capital Goods stock prices relative to
industrial activity, some of the strength in these groups makes sense. Moreover,
Capital Goods valuation has improved markedly and we are placing the industry
group on Upgrade Watch (currently Market Weight). We continue to be
overweight Diversified Financials, Insurance, Energy, Semiconductors, Retailing,
and Transportation as means to participate in the market. |
