Citi's Small & Mid Cap Investor Survey

Indeed, "the bulls are back"... Here is the summary:

“Buy The Dips” Mentality Seems Likely to Persist — Bulls were abundant in our latest quarterly survey of small/mid cap investors, conducted 9/21- 9/25/09. 67% think small/mid cap stocks will gain at least 3% in 4Q09 with just 11% looking for modest declines. For 2010, 82% expect gains beyond 3% (including 42% anticipating +10-20%). Just 6% are looking for 2010 declines.

Fuel For Optimism — Despite double digit gains in the small/mid cap indices since our June survey, valuations are still perceived as attractive by 58%, while EPS surprises are anticipated in the upcoming reporting season by 89%. Employment & economic assumptions are also improving. On average, our survey participants are expecting 3% real GDP growth in 2010 (vs. 2% in our 6/09 survey). 44% say the Fed won’t raise rates until 2H10, with another 18% saying the Fed won’t act until 2011 or beyond. 56% think employment will start to improve in 2010. Just 21% expected improvement in 2011 or beyond.

Divided Thoughts on the Global Growth Trade — Our latest survey respondents still embrace the basic tenets of the “global growth trade.” Over the next 12-18 months, 50% think inflation is a threat, 41% think the dollar will weaken, and 62% say crude will rise. In 2010, 68% think economic and/or EPS growth will be strongest in the Asia-Pacific region. Nevertheless, optimism for the Materials sector is slipping. In our June 2009 survey, 72% expected outperformance in 2H09 while 2% called for underperformance. In our Sept. 09 survey, just 45% are looking for outperformance in 4Q09 while only 33% think the sector will lead in 2010. In light of declining sentiment for this sector, we reiterate our mid Sept. downgrade to market weight (based on valuation).

Health Care Seen As Less Onerous — Although 33% currently think Health Care will lag in 4Q09 (similar to the sentiment expressed in our June 2009 survey), only 17% think the sector will lag in 2010. 50% of our survey respondents think the sector will market perform in 2010. Additionally, 59% say that Washington will agree on policy reform in 4Q09 or 1Q10, potentially removing a cloud of uncertainty. Though still underweight, we’re intrigued by the sector’s valuations and are keeping this sector on “upgrade watch.”

High Quality Stocks, Small Caps Expected to Lead — Small cap is the most popular choice for leadership in 4Q09 (by 35%) and 2010 (by 36%), as the percent most bullish on mid & micro caps is fading. 62% think “high quality” will start to lead in 4Q09 (23%of those polled) or 1Q10 (by 39%).

Despite double digit gains in the small/mid cap indices since our June survey, valuations are still perceived as attractive by 58%, while EPS surprises are anticipated in the upcoming reporting season by 89%. Over the next 12-18 months, 50% think inflation is a threat, 41% think the dollar will weaken, and 62% say crude will rise...

Who has seen a bear?