Rational Advisor

Citigroup last week issued their report on investor sentiments and the impact following that. The key measure they use is the Panic/Euphoria model, which has recently surprises of surprises dipped into panic territory. The sentiment is calculated by compiling several indicators, such as put-call ratios and liquidity preferences, to determine market direction.

They see the recent panic as not an item of concern, but actually as a good indicator of the future.

Their data for the last 20 years hsows that when Citigroups intermediate-term panic/euphoria model drops into panic territory, as it did last week, there is a 98% probability that the markets (S&P 500) will rise over the following 12 months and a slightly lower chance of gains over the six months.

The increases over the 12 months following such events have averaged above 10%.

It isn’t just the sentiment readings that have contributed to Citigroups view, Tailing Price/earnings multiples are at 14 to 16, which according to them is the sweet spot that offers the best subsequent 12 months return, both on an average and a median basis over the past 70 years.

When you line up, sentiment, earnings and valuation plus easing on credit conditions, it is very difficult to come up with a dire view.

For those that maybe questioning this model, and say that we may be having a similar thing to 1987, and 2000, when the tech bubble burst, realize that the index prior to those days was in euphoria mode, the exact opposite of today.

my concern is that if a similar index was to be created for Canada, we would probably still see a lot of euphoria, due to our reliance on the direction of commodity prices.

This is the time when a more global, and particularly US centric approach would seem more prudent. The other wise approach would be to within Canada have a higher weighting to defensive Bonds and Dividends.

If you want a copy of the chart email me.

Enjoy

Rational

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