The March 28, 2014 issue of PULSE Monitor by Citi analysts Tobias Levkovich, Lorraine Schmidt and Christina Wood shows Price and Earnings as positive factors but tending towards neutral. While Liquidity and Unanticipated are in neutral territory, Sentiment still reigns at high levels despite the recent sell-off.

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Valuation

The S&P 500 (INDEXSP:.INX) is trading at a 16.79X P/E multiple based on the trailing four-quarter S&P 500 operating EPS.

Historically, and as shown in the bull’s-eye graphic below, this multiple would fall in the 16X-18X band, indicating the likelihood of an average 5.9% return over the subsequent 12 months.

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“Our earnings yield is now 0.43 standard deviations above the rolling mean, suggesting that equity valuations are modestly overvalued based on this metric,” say the Citi analysts, referring to the normalized earnings yield gap analysis shown in the chart below.

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Liquidity

The Citi analysts point out that according to data from ICI, overall equity funds saw redemptions of $968 million during the week ended March 19.

Bond funds benefited, and received inflows of $2.49 billion.

Unanticipated PULSE framework

The Citi analysts place the market on a neutral footing in the Unanticipated (U) in the PULSE framework.

However, there could be negative repercussions out of the Ukraine crisis. Reportedly, the United States had to send its senior-most general in Europe back to the continent early from a trip to Washington over the last weekend. The Pentagon has complained of a lack of transparency by Russia over its troop movements on the Ukrainian border. Meanwhile, tense negotiations continue in Paris between US Secretary of State John Kerry and Russian Foreign Minister Sergei Lavrov over the Ukraine crisis.

There could, however, a positive surprise from the much anticipated non-farm payrolls figure for March due out on Friday. Analysts expect 200,000 jobs to be added in March, and are of the view that there is still scope of that figure being surpassed considering that polar weather is over. A larger than expected job creation report could act as a booster to equities.

Sentiment

“Our Panic/Euphoria model take down slightly but remained in euphoria territory,” say the Citi analysts. “Euphoria readings indicate the market may retreat with an 83% historical probability of losses in the next 12 months.”

According to the chart below, the Panic/Euphoria reading for the week stood at 0.63.

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Earnings

The Citi analysts observe that upward earnings revisions during March so far have fallen to 37.2% compared to 41.2% in February.

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