Keep 'buying the dips' (with a caveat or two), Citi says

Keep buying the dips, this bull market still has legs, strategists at Citi told clients, albeit with two caveats.

They pointed to their Bear Market Checklist to back-up their case, explaining that for global markets only three of the 18 factors included on it were 'flashing red'.

In the case of the US, the tally was 5.5 out of a total of 18, although Citi believed the current US BMC results were not yet "especially worrying".

Citi's checklist is divided into six broad groups of indicators: global equity valuations, the US Treasury yield curve, sentiment, corporate behaviour, corporate profitability and balance sheets/credit markets.

Within those categories, indicators flashing a red 'sell' signal when compared to their levels in 2000 and 2007 - the two previous market peaks - score 1.0 and those which are close to it and flashing an amber signal score 0.5.

At the global level, four indicators were 'amber', Citi said, including trailing price-to-earnings multiples, forwards P/Es, the slope of the US yield curve, Citi's US Panic Euphoria model and companies' (excluding US financials) net debt-to-EBITDA ratios.

In the US on the other hand, three indicators were flasing red and five were in amber.

On a common note for both the global and US BMCs, Citi said its indicators for the US yield curve and US equity market sentiment had turned amber in the latest edition of its checklist.

"A flat curve indicates that Fed policy is tight and likely to drive a slowdown in the economy. Therefore, we watch the recent flattening of the US curve with concern, and turn it to amber.

"Tobias Levkovich’s US Panic/Euphoria model comprises of nine factors correlated with future stock price performance. It has recently risen to levels that have implied a greater than 50% probability of a down market in the next 12 months."

However, according to Citi there was a caveat, two even, to its relatively upbeat prognosis.

"The end of QE and high Chinese corporate debt give cause for concern. Neither is in our BMC."