Market Insider

Citi Strategist Bumps Target

You can't fight the tape

Or the surge.

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In a note titled, "Succumbing to the Surge," Citigroup chief U.S. equities strategist TobiasLevkovich said he's raising his S&P 500 target to a range of 1100 to 1150, from 1000 to 1100 for year end 2009 and 2010. The S&P 500 ended Tuesday at 1110.

I've spoken to Levkovich about that target several times in the past couple of months, and he always said there was a chance the market would overshoot. Now his overshot range is 1200 to 1250.

He says he pushed up his target because he sees little chance of a major correction after recent comments from the Fed and G-20 making it unlikely there will be a major liquidity shift any time soon.

He said he is raising the target even though he sees a warning signal in the upward earnings estimate revisions. One would assume as analysts become more confident in raising forecasts, there is less chance for surprise-related bounces in stock prices.

Other indicators he watches though signal a higher market. One of those is his "panic/euphoria" sentiment indicator, a contrarian barometer which had been showing that investors had a less cautious view of the market. However, that changed after the 6 percent pull back in late October, and investors are now showing more signs of anxiety and defensive positioning.

Levkovich also writes that his volatility indicators show the CBOE's VIX (volatility index) declining further in 2010, which would translate to higher stock prices. He also said the outlook for corporate earnings supports a strong start to 2010 for stocks. "Keep in mind that earnings have generally been the most critical factor for equity market direction and quarterly EPS also suggest that equity markets can get to 1200 or higher in 2010," he wrote.

Levkovich acknowledges that he's lifting the 2009 target "belatedly" and that the outlook for 2010 "gets tricky." For one, rising bond yields could be a factor if the Fed raises rates. He also points to uncertainties for the second half of the year, such as the mid term election and the potential for new tax policy for 2011.

He said next year's gains appear to being "pulled forward." In the first half of the year, stocks should be helped by better earnings even if January could be "challenging."

Earnings should be helped in the first part of the year by "rising industrial activity as a result of improved credit conditions and way too aggressive inventory de-stocking in 2009."

One promising sign for stocks is that individual inventors continue to pump more money into bond funds this year than stock funds. Through September, $268 billion was directed to bond funds, as compared to just $2 billion to equity funds. "As long as the retail investors remain so frightened off from stocks, it seems likely that more upside is probable but if they begin to feel very comfortable chasing returns, caution may become more appropriate," he said.

Questions?  Comments?