Citi Fears The Sustainability Of The US Equity Market Rally

We are concerned about the sustainability of the Equity market rally at this stage,” warns Citi’s FX Technicals’ Tom Fitzpatrick. Between price action parallels to those seens around the peaks in 2000, the fragility of confidence, the Fed taking its “foot off the gas” and bonds now yielding considerably more than stocks, Citi adds, though we are yet to see bearish breaks, they doubt higher highs wil be sustained for long.



The price action on the S&P 500 reminds us of that seen around the highs in 2000

Starting on the left of the chart, there was a serious correction down in the S&P 500 of 22%. This was at the time of the Asia and Russia Crises

That looks very similar to the 22% correction down seen in 2011

Both of these corrections of 22% each were reversed by a bullish monthly reversal (not shown on this chart as it is a weekly chart)

From that 1998 low, the S&P 500 rallied 68% to the high in 2000. At that high the market was 14% above the 55 week moving average while we also had a large gap between the 55 week and 200 week

This time the market has rallied 72% from the 2011 high and currently the 55 week moving average stands at 1655. 14% above that level would put the S&P 500 at 1,887 which is marginally above where we trade today

We also see a large gap between the 55 and 200 week moving average similar to that seen in 2000.

So overall, from a price action perspective, the trend is mature and is as stretched as it was in 2000.

Furthermore, as previously highlighted,

  • Confidence appears fragile and likely to move lower (Confidence is not dependent on the stock market but quite often the other way round)
  • The Fed is taking the “foot off the gas” which has been the primary driver of this stock market rally
  • Bonds yield more than equities now (The S&P 500 dividend yield is at 1.9% while the 10 year yield is currently 2.9%)

So overall, while we are yet to see bearish breaks, we are concerned here with the S&P 500 from a medium term perspective. It may well be possible for a higher high still (in 2000, the market made a marginal new high in March but then fell back), though we doubt such a development will be sustained for long


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