Citi Analysis Suggests Bull Market Will Continue

Citi Analysis

With many fearing that we have entered into a bear market with stocks, perhaps indicating a time to exit or pull back, analysts at Citi provide reassurance.

Predicting transitions between bull and bear markets can indeed be tricky. While a true bear market usually leaves little to wonder about, 2018 has been one of those circumstances that has proved to be pretty difficult to judge.

Many expected 2018 to be a continuation of the bull market that we have seen since 2009, as the markets recovered from the major drop caused by what is known as the Great Recession. That didn’t quite happen, and most of the year could perhaps best be described as a consolidation period, which often precedes a reversal.

Then, in the fourth quarter of 2018, specifically between Oct 3 and Dec 24, we saw markets decline by around 20%, which is a significant move indeed. Had the bear market that many had feared was just around the corner finally come home to roost?

Declines of this magnitude are often ominous, especially since the bigger declines, the 50-75% ones in particular, are preceded by smaller drops, and where we go from here really ends up telling the tale of whether we’re about to go bigger to the downside or show strength and reverse at least somewhat.

In 2000 and 2007, we saw the downward trends continue, and those were true bear markets, even though they weren’t that long lasting compared to some ones we’ve seen in the past. When stocks lose more than 70% of their value on average, it doesn’t matter that they do so in just a couple of years, and in fact, this tends to make the bear market even more dramatic.

Separating the real bear moves from merely consolidation

Declines of 20% can, of course, still make a lot of investors nervous, even though this is generally not big enough to have us at a tipping point where nervousness turns to panic, which can end up toppling markets.

The early part of 2019 was set to tell the tale here, and a large part of the decision making that led to things turning around so far does have to do with the way large institutional investors perceived the situation.

Institutions represent the majority of money in the market, and institutional investors spend a lot of time going over fundamental data. There may not be as important a time for this as when we are seemingly on the brink of a major market reversal, such as the prospects of the current bull market ending.

According to analysts at Citi, their fundamental data, which is very broad in scope as it should be for this purpose, indicates that we are nowhere near the conditions that tend to precede a major bear market and, in fact, the current bull market will likely continue.

Their current bear score, based upon analyzing 18 different factors, is only at 3.5. In comparison, the score in 2000 was 17.5, and 13 in 2007, both years that saw major bear reversals in the stock market.

If we think back to those years, 2000 and 2007, it is not surprising that we got some very poor scores in major fundamental criteria, given how overbought the stock market was seen to be at these points in time.

We’re really not anywhere near these scenarios now, based upon both Citi’s analysis and a more general look at fundamentals. This is especially true if we focus on bonds, and Citi is particularly interested in bond performance and points out that things like changes in yield curves and bond spreads are particularly telling.

It is well known that a lot of money flows into bonds when stock markets pull back, and when bonds are performing well and stocks are not, there is a higher risk of this continuing. As stocks move down, bonds become more appealing, and therefore, looking at just how appealing people think they are does tell a good story in itself.

Taking the temperature of the market overall

Citi’s analysis looked at several other factors, including equity valuations, profitability, corporate behavior, credit markets, and sentiment. Sentiment in particular is quite important, since it is sentiment that ultimately drives these decisions, and we could say that sentiment indicators are the sum of all the other data which drives it.

Sentiment is actually leaning a bit toward a bear market, and not surprisingly given the move down that we did see in late 2018. We do seem to be holding steady here and this overall has probably improved a lot since the late December rebound.

As it turns out, this year’s Santa Claus rally was particularly kind, and we’ve now regained half of the 20% drop, where we’re up about 10% from the Christmas Eve low.

Citi seems to be preaching caution though in spite of their reassuring results. “For now, we are reassured,” remarks Robert Buckland, Citi’s chief global equity strategist. Things sure are looking better lately though, and the things looked at in this report no doubt drive at least part of this, where some large players take Citi’s advice and buy on the dip than sell into it.

The actual behavior of these big participants is what really drives major market reversals, so looking at what drives their behavior can indeed provide a lot of insight.

Eric Baker


Eric has a deep understanding of what moves prices and how we can predict them to take advantage. He also understands why so many traders fail and how they may help themselves.

Contact Eric: [email protected]

Areas of interest: News & updates from the Commodity Futures Trading Commission, Banking, Futures, Derivatives & more.