Market indicators are adding to investors “overly fearful” state, even as stocks appear to offer more value than bonds, according to Citigroup Inc.’s chief U.S. equity strategist Tobias Levkovich.
Signals that point to a stock plunge, including the Hindenburg Omen, named for a German zeppelin that caught fire and crashed more than seven decades ago, have increased investors’ negative sentiment toward equity markets, Levkovich, said today in a radio interview with Tom Keene on “Bloomberg Surveillance. The Hindenburg Omen, occurring when an unusually high number of companies on the New York Stock Exchange reach 52-week highs and lows, only signals a slump in stocks one in four times, Levkovich said.
“On a relative basis, equities look a lot more attractive than bonds do at this point,” Levkovich said. “I want to buy on weakness, so when the markets pull back I want to take advantage. I don’t want to chase the market given some of the uncertainties in place today.”
New York-based Levkovich, 49, estimated the Standard & Poors 500 index will close 2010 at 1,175, an increase of 9.2 percent from yesterday’s close of 1,076.
The benchmark U.S. Treasury 10-year note advanced, with its yield falling 2 basis points to 2.58 percent at 10:29 a.m. in New York, according to BGCantor Market Data. The S&P 500 fell 0.6 percent.
While bonds are not bad investments, Levkovich said, the “extremities of the money flows” into fixed income from equities is troubling. Cash flowed the opposite way into stocks a decade ago, he said.
“In 2000 or late 1999, we saw massive amounts of money going into the equity market at just the wrong time,” Levkovich said. “I feel the same way when I look at all the money going into bonds.”
Investors have increased their bond holdings, putting $18.8 billion into taxable bond mutual funds in June and $11.9 billion in May. Net cash flow for stock mutual funds was negative during those two months, with investors removing $5.4 billion and $24.8 billion, respectively, according to Investment Company Institute data.
U.S. government debt has returned 8.2 percent this year, compared with 10.4 percent return for U.S. investment-grade corporate debt, according to Merrill Lynch indexes. The S&P 500 returned minus 4.1 percent since Jan. 1.
A successful global stimulus that spurs growth and inflation poses the greatest concern for the bond market, said Levkovich. On the other hand, failed stimulus could lead to deflation and a ballooning deficit.
“We can say, ‘Well, it’s Japan, and they went through this,’” he said. “But Japan doesn’t source 40 percent of their funding from outside their country. We do.”