Citi's Levkovich Finds Worrisome Complacency, Even After Stocks' Plunge

Tobias Levkovich, chief U.S. equity strategist for Citigroup (C), did an excellent job chronicling investors' lingering skepticism toward the stock market as the rally progressed from the climactic lows last March. That kept his followers heavily invested pretty much throughout the advance.

Skepticism is still there, Levkovich says in a note to investors issued Monday, only it has evolved into disbelief about the decline that took more than 10 percent off market indexes over the course of just three days in early May.

The disbelief is hard to believe. The decline that culminated on May 6, at one point taking the Dow Jones industrial average down nearly 1,000 points, the most ever in a single trading session, was bracing, to say the least, and sure felt like panic selling.

The episode has been chalked up to a computer glitch - Wall Street: Rise of the Machines. Perhaps being able to explain it away as an aberration out of anyone's control has helped wring the emotion out of traders. Whatever the cause, their psyches are conspicuously untroubled, Levkovich writes:

"Given the equity market's continued volatility, it is worthwhile to consider that many in the investment community seem more willing to step up to stocks now than they were in early February or much of last year when skepticism and even cynicism were predominant feelings. . . . Citi's client polls and general survey data highlight a greater willingness to believe in economic and earnings progress supporting investment community confidence."
As has been noted often, including here and here, strong bullish sentiment tends to precede falling share prices and vice versa. Levkovich does not expect a full-blown bear market because earnings have improved and valuations in the stock market are not excessive, but he does find the absence of nerves unnerving.

He would remain circumspect about buying stocks until clear signs emerge that investors' faith in the stock market is eroding. One helpful development would be a reduction in upward revisions of analysts' earnings estimates. That would suggest that expectations had come down, making them all the more easy to exceed.

"The lack of severe anxiety leaves us unimpressed with respect to generating the building blocks for a renewed rally thrust at this juncture," Levkovich says. His advice is to sit tight until there's "a marked decline in sentiment readings that would intimate that real fear has come back into markets."