End of a bear market? Why S&P 500 could fail to make a new low - Citi

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By Senad Karaahmetovic

Citi strategists weighed in on the recent rally in equities despite the fact that fundamentals continue to indicate the U.S. is heading into a recession. Citi sees a 60% chance of a recession in the U.S.

They note that the yield curve remains strongly inverted and the ISM is still in contractionary territory.

"Given that we go into recession, historically SPX has never bottomed before the start of the recession. Typically, there are even several months between the start of Fed easing and the bottom in U.S. equities," they wrote in a client note.

On the other hand, the S&P 500 has now crossed above the 200 daily moving average, which is "an important technical level."

"Technicals related to SPX 200dma are indicating that the bottom may already be in. Equity markets broke more than 3.5% above the 200dma, a level at that we have never seen SPX make a new low from during a bear market," the strategists note.

Despite the fact that technicals point towards the end of a bear market, they add that prior downturns often offered "smaller" sell-offs that are seen as a buying opportunity.

"At this stage, we estimate a sell-off without making a new low would indicate a maximum downside of less than -11.4%, while the upside to a new high would be more than 17.3%."

Still, Citi strategists believe that U.S. equities are likely to underperform other global equity markets given still-high valuations.