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10 Warning Signs of Springtime Stock Slump: LPL’s Kleintop

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That old stock-market adage “sell in May and go away” has taken on extra meaning in the last couple of years with spectacular starts to the year that fizzle by the time springtime comes, according to LPL Financial chief market strategist Jeff Kleintop.

In each of the past two years, the stock market began a slide in the spring that lasted well into the summer months. So are stocks poised to repeat the pattern this year? The chances are 50-50, Kleintop reported in a weekly market commentary on March 28.

“We have identified 10 indicators to watch closely in the coming weeks that may warn of an impending slide,” Kleintop writes. “So far, about half of the 10 indicators point to a repeat of the spring slide this year, while the other half do not.”

In both 2010 and 2011 an early run-up in the stock market — similar to the one happening now — pushed stocks up about 10% for the year by mid-April. “On April 23, 2010 and April 29, 2011, the S&P 500 made peaks that were followed by 16% to 19% losses that were not recouped for more than five months,” he notes.

Here are the 10 indicators that LPL’s market strategists have identified to watch closely in the coming weeks.

Fed stimulus1. Fed Stimulus

In the last two years, the Federal Reserve’s quantitative-easing stimulus programs, QE1 and QE2, ended in spring or summer and stocks began to slide until the next program was announced, Kleintop wrote. “The current program known as Operation Twist was announced on Sept. 12, 2011, and is scheduled to conclude at the end of June. The stock market may again begin to slide until another program such as QE3, the scope of which was recently hinted at by the Fed, is announced.”

2. Economic Surprises

“The Citigroup Economic Surprise index measures how economic data in the United States fared compared to economists’ expectations,” Kleintop wrote. “The index moved to what has historically marked the peaks in optimism about a month or two before the peaks in the stock market in 2010 and 2011. This year, it appears the index may have already started to retreat from a peak since early February; if this index again leads by two months the slide may soon begin.”

holiday shoppers3. Consumer Confidence

(Holiday shoppers with Macy’s bags in 2011. Photo: AP)

In early 2010 and 2011, Rasmussen’s measure of consumer confidence rose to highs last seen on Sept. 5, 2008, just before the financial crisis took off, Kleintop says. “We will be watching for a turn lower in the index that would indicate the start of an erosion of confidence,” he writes.

4. Earnings Revisions

“The first couple of weeks of the first-quarter earnings season (April 2010 and April 2011) drove earnings estimates higher in both” years, Kleintop wrote. “Earnings estimates for S&P 500 companies over the next year rose a greater-than-average 3% to 5% over the first couple of weeks of reports. But as the second half of the earnings season got underway in May 2010 and May 2011, guidance disappointed analysts and investors as the pace of upward revisions declined sharply. This year, we will be watching to see how much earnings expectations rise as the initial reports come in and if they begin to taper off sharply.”

oil derrick5. Oil Prices

“In 2010 and 2011, oil prices rose about $15 to $20 from around the start of February, two months before the stock market began to decline. This year oil prices have climbed back to the levels around $105 to $110 that they reached in April 2011,” Kleintop writes. “However, they have risen only about $10 since around the start of February 2012. A further surge in oil prices would make this indicator more worrisome.”

6. Yield Curve

The greater the spread between the yield on the 2-year and the 10-year U.S. Treasury notes, the more growth the market is pricing into the economy, Kleintop wrote. This yield curve peaked in February of both years at 2.9%, Kleintop notes, adding, “Then the curve started to flatten, suggesting a gradually increasing concern about the economy. This year the market is pricing a more modest outlook for growth, but we will be watching to see if the recent slight decline in the spread, currently about 190 basis points, begins to decline.”

Bovespa Traders, Sao Paulo7. The VIX Volatility Index

(Traders on the Bovespa trading floor in Sao Paulo, Brazil. Photo: AP)

“In each of the past two years the VIX, an options-based measure of the forecast for volatility in the stock market, fell to a relatively low 15 in April,” Kleintop said. “This suggested investors may have become complacent and risked being surprised by a negative event or data. This year, the VIX has recently declined once again to 15 in the past two weeks.”

8. The LPL Financial Current Conditions Index (CCI)

In 2010 and 2011, LPL Financial’s index of 10 real-time economic and market conditions peaked around the 250 level in April and began to fall by more than 50 points, Kleintop notes. This year, the CCI recently reached 249 and has started to weaken and currently stands at 232.

people waiting at a job fair9. Initial Jobless Claims

(People waiting at a job fair. Photo: AP)

“It was evident that initial filings for unemployment benefits had halted their improvement by early April 2010, and beginning in early April 2011, they deteriorated sharply,” Kleintop writes. So far in 2012, he adds, initial jobless claims continue to improve at a solid pace, “but it may yet be too early, and so we will be watching for any weakening as April gets under way.”

10. Inflation Expectations

“The University of Michigan consumer survey reflected a rise in inflation expectations in March and April of the past two years,” Kleintop wrote. “In fact, in 2011, the one-year inflation outlook rose to 4.6% in both March and April. This year, inflation expectations have also jumped higher so far in March, reaching 4%.”


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