Stocktake: No bear market, but risks are rising

Stocks are high right now but investors are nervous. The S&P 500 suffered its biggest one-day fall in three months last Wednesday before rebounding the following day. The Vix, or fear index, recorded its biggest one-day jump in two years, exceeding the 30 level that is often seen during turbulent times.

If stocks fall, should you buy the dip? Or is a bear market approaching?

Citi’s widely-followed bear market checklist suggests buying the dip, but risks are rising.

It tracks 18 warning signs for investors, including factors like valuation, corporate fundamentals and sentiment. At 2000’s market top, 17.5 out of 18 indicators were flashing sell signals; in 2007, 13 indicators were in the red zone.

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Things are better today; the checklist is telling investors to buy the next dip, but the total number of red flags – 8 out of 18 – is nevertheless the highest number since 2009. The odds of a serious reversal are higher if more than 8 or 9 indicators are flashing, while readings above 10 strongly suggest a need for investor caution.

Cautious investors may be more wary of the US (9.5 out of 18 sell signals), although Europe and emerging markets look safer, with scores of 5 and 6.5, respectively.

Overall, Citi’s checklist suggests the bull market is intact, but this is not a time to bet the farm.