Citi's strategy team notes how market sentiment in 2010 have run from panic to complacency, and now back again to panic. It's a reason to believe that the sell-off will reverse by year end, according to Tobias Levkovich:
Sentiment shifted from panic to complacency but now is back in panic mode. In early 2010, there was deep anxiety that the recovery rally from March 2009 had come too far given Greek debt fears, Chinese monetary policy tightening moves and perceived unfavorable policies out of Washington. By early February, the Panic/Euphoria Model had slipped back into panic territory. Yet, after 15%-20% appreciation in equity indices, this proprietary sentiment gauge advanced into complacency in April, leaving markets vulnerable to a pullback. In the past weeks, the model has collapsed back into panic, suggesting a high probability that the S&P 500 climbs in six months, supporting out 1,175 year-end 2010 target.
Yet one shouldn't be wildly bullish either...
Uncertainty about 2011 trends is likely to cap any major summer rally efforts. While some may look for guidance out of the 2Q10 reporting season, which begins next month, it seems doubtful that issues including tax policies, government spending programs, housing trends, unemployment, trade disputes and currency trends will be settled that quickly. Ambiguity around capex is being resolved, but 2011 clarity is likely to be found later in the year rather than over the summer.
Thus this seems to be a 2010 trading call, cognizant of the major challenges facing markets and the economy, but just pointing out that the sell-off has its limits and has gone too far.
Here's a chart I particularly like from the piece, showing the trend of reported earnings vs. the performance of the S&P 500:
(Via Citi, A Mid-2010 Perspective, Tobias Levkovich, 29 June 2010)
Read more: http://www.businessinsider.com/citi-weve-gone-from-panic-to-complacency-and-now-were-back-to-panic-mode-2010-6#ixzz0sLOHm3Pt
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