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

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.

1. 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.”

3. 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.”

5. Oil Prices