Will There Be a Spring Stock Market Slide?
In both 2010 and 2011 an early run-up in the stock market, similar to this year's, 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%-19% losses that were not recouped for more than five months, a phenomenon often referred to by the old adage "Sell in May and go away."
Now we're at the time of year that the 2010 and 2011 slides began, so it's time to revisit our indicators.
So far, about half of the 10 indicators are waving a red flag, while four are yellow for caution, and only one is green. On balance the indicators point to a significant risk of a repeat of the spring slide. We will continue to monitor these closely in the coming weeks.
1. Fed stimulus (red) -- In each of the past two years, Federal Reserve stimulus programs known as QE1 & QE2 came to an end in the spring or summer, and stocks began to slide until the next program was announced.
The current program known as Operation Twist was announced on Sept. 12, 2011 and is coming to an end. It is scheduled to conclude at the end of June 2012. The Fed's communications in April appeared no closer to announcing QE3, raising the risk of a repeat of the spring slide.
2. Economic surprises (red) -- The Citigroup Economic Surprise index measures how economic data in the U.S. fared compared to economists' expectations. The currently falling line suggests expectations have become too high; this typically coincides with a falling stock market relative to the safe haven of 10-year Treasuries.
Chart 1: Economic Surprises and Market Performance
Citigroup Economic Surprise Index and S&P 500 Less 10-Year Treasury 3-Month Total Return
The Citigroup Economic Surprise Index is an unmanaged index and cannot be invested in directly. Past performance is no guarantee of future results.
3. Consumer confidence (red) -- In 2010 and 2011, early in the year the daily tracking of consumer confidence measured by Rasmussen rose to highs just before the stock market collapse as the financial crisis erupted.
The peak in optimism gave way to a selloff as buying faded. Investor net purchases of domestic equity mutual funds began to plunge and turned sharply negative in the following months. This measure of confidence is once again beginning to fall from the highs.
Chart 2: Consumer Confidence
Rasmussen Daily Consumer Confidence Index