Citi believes that it may be time to start buying shares again, as its bear market model signals that conditions are improving. The bank’s “bear market checklist” or BMC – which looks at a wide range of potential indicators of a market downturn, including valuation, credit spreads, M&A activity and fund flows – is currently raising six out of 18 possible red flags. That is a decrease from 8.5 flags at the end of last year. Robert Buckland, Citi’s leading global equity strategist, noted that equities have historically risen as the number of red flags falls. “Buying when BMC falls to the current 6/18 red flags has generated healthy 12-month gains (average + 31%), even in multi-year bear markets,” Buckland wrote in a statement to customers on Thursday. Some of the red flags that still appear on the checklist are return on equity, a flat return curve and high analysts’ bullishness. The S&P 500 has lost more than 16% so far this year, including Wednesday’s closing, and dipped briefly into an intraday bear market last week as concerns about rising inflation and tighter monetary policy have led investors to dump more risky assets. The bear market model most recently showed a buy-the-dip signal in February 2020 – at the beginning of the Covid pandemic – when 5.5 of 18 flags were raised. The market reached its bottom in March 2020 and then set off on a windy rally that eventually took it to record levels as late as the beginning of January. “Even if BMC misses certain factors, we would still expect an unsustainable global market peak to be accompanied by more than the 8.5 / 18 red flags experienced in December last year. In addition, we are reassured by the fall to 18/6 and the healthy 12 million profits generated by buying at these levels previously, “said Buckland. “It’s a brave call, but BMC has made its name by making brave calls. It wants to buy this dip.” Summary: The market has been under pressure for a number of reasons, including high inflation, rising interest rates, the war in Ukraine and Covid deadlocks in China. But if Citi’s bear market checklist is correct, then market conditions have begun to improve – and investors may want to start nibbling on stocks again. – CNBC’s Michael Bloom contributed reporting.
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