`Bear Market Checklist' Tells Citi to Relax and Buy This Dip

(Bloomberg) -- Despite the recent volatility, a checklist of stock market indicators is flashing few sell signals indicating the current correction should be bought, according to Citigroup Inc.

Only two-and-a-half out of the 18 factors on Citi's list are marked as “worrying,” strategists including Robert Buckland wrote in a recent note to clients. The same measures showed 17 and 1/2 signals before the dotcom bubble burst and 13 warning signs before the global financial crisis, they said.

“The checklist would have helped us hold our nerve in 2011-12 and told us to do the same during sharp corrections in August 2015 and early 2016,” the strategists wrote. “Right now, it is telling us to buy this dip.”

Citi's “bear market checklist” is not supposed to be seen as a market-timing model, the bank cautioned. It won't predict when a short-term stock market correction is imminent. However, it does suggest what investors should do when that correction occurs.

Among the indicators that do concern the strategists are high-trailing price-earnings ratios and “frothier” returns on equity. What they are focusing on the most though are the yield curve and credit spreads, with the former a mild concern and the latter still benign.

“When the curve is flat or downward sloping and spreads are high and rising then there is a good chance that recession and an associated bear market are imminent,” the strategists wrote.

To contact the reporter on this story: Cormac Mullen in Tokyo at cmullen9@bloomberg.net.

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Andreea Papuc, Ravil Shirodkar

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