Citigroup Global Equity Strategist

The Twilight Zone: A Playbook

Twilight Zone — This is the phase in a global earnings recession where share prices start to rise despite further falls in corporate earnings. The beginning of the Twilight Zone is associated with sector rotation out of defensives into cyclicals.

This Could Be It — The latest equity market rebound has occurred against a backdrop of cheap valuations, stabilising lead economic indicators and tightening credit spreads. All have been associated with previous Twilight Zones.

Market Strategy: More To Go For — The recent 25% rebound in global equities represents the fastest ever start to a Twilight Zone and suggests that some consolidation may be appropriate. However, an average performance of 45% through previous global Twilight Zones suggests that investors should buy equities into any weakness

Sector Strategy: Don’t Chase It — Recent rotation towards cyclical sectors is already as large as seen in other Twilight Zones. This suggests that it may already be too late to make the switch.