Earlier we showed why, one day after JPM said that "the regime of buying the dips might be over and selling any rallies might be the new one", another major bank, this time Citigroup, said that after six years of outperformance, "fading EPS momentum and rising Fed funds mean that... we cut the US to Underweight."
Perhaps the most important observation Citi made was that the US economy is now precariously poised between Phase 3 and Phase 4 in the credit/equity cycle: "Phase 4 when both equity and credit sell-off sharply. It seems that we are now well into Phase 3 of the US credit/equity cycle although the ECB is trying to hold back the progression of this cycle, in the Eurozone."
How long the ECB keeps the US on life support may be the most important question of all as we enter 2016.
And while there is much more surprising gloom, if not all out doom, in the full report (link), it wasn't all bad. For Citi, the biggest bullish factor is that when looking at its "bear market checklist", only 3.5 factors are "flashing red":
What else would make us worry the next full-blown bear market is imminent? Figure 15 compares the current situation to the start of previous bear markets. In 2000, almost all our 16 checklist factors were flashing red. In 2007, we had 12.5 sending warning signals. This compares to 3.5 now, although this is up from just one in 2014. This bull market is definitely showing signs of old age but may not be finished yet. We will continue to watch these variables closely.
This is where we stand on Citi's current bear market checklist.
We wonder how many of "non-red" checks would be flashing angry burgundy, if it wasn't for the latent effect of $13 trillion in central bank liquidity injections, and what these checklists will show after a few more rate hikes and a few trillion in petrodollar FX reserve liquidations?