Citi's Stock Bubble Warning: Don't Sell Yet!

Investors Beware: Bubble Alarm on Wall Street!

The rise in AI stocks on U.S. exchanges is causing serious bubble concerns among investors. However, recent reports are questioning these worries. CitiGroup, one of Wall Street’s leading banks, emphasizes that investors should not act hastily at this stage. Adam Pickett, Citi's Head of Global Market Strategy, and his team indicate that the market rally could continue.

Citi’s Strategy Note

Citi strategists underscore the importance of monitoring two critical indicators. According to their report, it is essential to wait for specific signals before the stock market bubble bursts. The strategists state, “U.S. stocks are in a bubble. Historically, strong returns are observed in a bubble scenario. Therefore, it is advantageous to sell only when the bubble has burst.”

Early Stage of the Bubble and Interest Rate Policies

In recent months, investors have been concerned about the overvaluation of stocks. However, the S&P 500 Index has increased by 35% in the second half of 2023 and still holds growth potential. Citi’s analysis reveals that the current situation is still in its early stages, based on eight stock market bubbles since 1929.

The U.S. Federal Reserve (Fed) is cutting interest rates during this process. While investors anticipate a 75 basis point cut, Citi expects a total drop of 100 basis points. This situation is emerging as another factor that increases the value of stocks.

When to Sell?

Citi strategists indicate that there are two critical indicators for determining the right time to sell:

• POLLS Indicator: This composite index measures market positioning, optimism, and liquidity. If this indicator rises to 18 or above, it may signal that the bubble is about to burst. The current level is 13.
• “When the Generals Fail” Indicator: When three leading stocks in the S&P 500 fall below their 200-day moving average, it signals a directional change in the market. However, currently, this indicator does not signal warning signs for stocks.

While some analysts on Wall Street discuss the potential existence of a bubble in the American stock market, the market overall is forecasting a gradual increase until 2026. Bank of America has raised its 12-month target for the S&P 500 to 7,200 points, while Goldman Sachs has set a target of 6,900 points.