The Market Selloff Has Nothing to Do With the U.S. Economy

(Bloomberg)The selloff in U.S. equities resumed on Monday.

The S&P 500, Dow Jones Industrial Average, and Nasdaq all opened well in the red after index futures contracts hit their daily loss limits in premarket trading but have since moved off their lows of the day.

Does the stock market reflect softening in the U.S. economy, or is there a divorce between the two? Tobias Levkovich, chief equity strategist at Citigroup, insists that it's the latter.

"U.S. economic trends are still very much driven by domestic phenomenon and data points continue to intimate growth as opposed to developments overseas that are creating turbulence and distressing investors," he writes. "Specifically, American employment, plus consumer and capital spending (ex-energy) remain on track."

The two key sectors to look at to gauge the health of the American consumer and economy—automotive and housing—still look healthy, according to Levkovich:And though spreads have widened in investment-grade and high-yield debt markets, surveys indicate that companies both large and small have not yet seen their access to credit meaningfully reduced, in clear contrast to what occurred in 2007-08.

Even so, it may be difficult for investors to find a reason to pull the trigger and use this opportunity to buy on the dip.

"The issue at hand is the lack of clear catalysts to embolden investors to buy into weakness as many have stopped to gaze at charts and wallow in worry rather than to take advantage of dislocations," the strategist says.

Levkovich points to three indicators that are at levels close to the previous market bottom in October and suggest that a rebound could be imminent:

The share of stocks listed on the New York Stock Exchange trading at or below their 200-day moving average is within shouting distance of the October 2014 level.
The ratio of 90-day to 30-day implied volatility is more than two standard deviations below its longer-term norm.
The put/call ratio exceeds the level it was at last October.

"In this context, investors should be sharpening some pencils to find the corn being thrown out with the chaff," he concludes. Cars are looking good