Everyone’s Worried About a Bear Market. Here’s How to Spot One.| BMG DIY Investor

Everyone’s Worried About a Bear Market. Here’s How to Spot One.

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The S&P 500 is trading at an all-time high, and the Dow Jones Industrial Average is closing in on one—and yet we know that every bear market is preceded by a record. So how can we be sure that concerns that this is just the top before the tumble are not real?

Citigroup strategist Robert Buckland helpfully keeps a bear-market checklist that looks at 18 potential signs that a bull market has ended, including measures of valuation, sentiment, corporate behavior, and credit-market strength. The checklist isn’t meant to be a timing tool, but rather help guide investor behavior during a selloff: Should you buy the dip or sell the rip?

The checklist has done a good job of signaling the turn. Nearly all 18 were in the red at the S&P 500’s top in 2000, while one more was yellow—giving a score of 17.5. In 2007, 12 of the 18 were warning of a bear market, while two were yellow, giving a score of 13. Today, however, just two are flashing red globally, while four are yellow, producing a score of just 4. The two in the red are the ratio of net debt to Ebitda (earnings before interest, taxes, depreciation, and amortization), which currently sits at 1.6, and is a sign of heavy debt load on corporate balance sheets, and the flattening of the yield curve. The global market’s trailing P/E of 18, a Neutral reading on Citi’s Panic Euphoria model—a difference of just 121 basis points (a basis point is 1/100th of a percentage point) between investment-grade bonds and equivalent Treasuries—and a global return-on-equity of 13.3% both sit in the yellow range.

For the U.S. alone, the bear-market checklist has a reading of 7, thanks to its cyclically adjusted P/E of 31, among other factors. “We would also point out that the U.S. market looks most frothy,” Buckland writes. “We would certainly turn more wary of buying the dips if the red flags headed over 10.”

Everyone’s Worried About a Bear Market. Here’s How to Spot One | BMG DIY Investor

We’re not there yet, however. “Equity inflows would need to pick up, valuations increase and corporate activity accelerate before the BMC indicates end-cycle euphoria,” Buckland writes. “It is telling investors to buy the next dip, just as it told them to buy the last one.”

When the dip comes.

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