We’re officially in panic mode.
Citigroup’s (NYSE: C) Panic/Euphoria model moved into the panic levels after a massive plunge in stocks last month, according to Tobias Levkovich, chief U.S. equity strategist at Citigroup.
The Panic/Euphoria model has a good track record of predicting pullbacks and surges in the market. It takes into account factors like newsletter sentiment, margin debt, and options activity.
The model breached the Euphoria level back in 1999 before the bursting of the dotcom bubble in 2000, and also fell into Panic mode in 2016 prior to the big rally following the presidential election.
Both Levkovich and BMO Capital Markets’ Brian Belski became the newest bulls to adjust their outlooks for 2019 this week following the tumble in equities last month.
Levkovich slashed his 2019 year-end forecast for the S&P 500 from 3,100 to 2,850, noting that only one of the bank’s dozen valuation models now holds up the old target after stocks sank as much as 20% last month marking the worst December since 1931.
His new target still predicts a 14% rally in 2019, though it trails the Wall Street average estimate of 2,975, according to the latest Bloomberg strategists survey.
Belski reduced his target from 3,150 to 3,000.
“2018 was a humbling year,” Belski, BMO’s chief investment strategist, wrote in a note to clients. “After all the market is rarely wrong, and 2018 was no different – even if we believe emotions, rhetoric, and innuendo ultimately skewed prices more than we forecasted or accounted for.”
Stocks have fallen as investors have begun to fear a global economic slowdown, continued interest rate hikes by the Fed, and the ongoing trade war with China.
“Ugly may be a kind word to describe the last month of stock market trading with a ‘buyers strike’ being evident,” Levkovich said.
But it’s not all bad news. Levkovich said that, “valuation is now indicative of 16%-like upside opportunity and sentiment has declined into panic. … At this stage, we foresee opportunity with our key sentiment indicator implying a more than 97% chance of the S&P 500 being higher in 12 months.”