PRESENTING: The 10 Ominous Signs That Will Portend Another Spring Stock Market Sell-Off

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Photo: AP

So what happens next with stocks as they continue to trade near four-year highs?”In each of the past two years the stock market began a slide in the spring, a phenomenon often referred to by the old adage ‘sell in May and go away,’ which lasted well into the summer months,” wrote LPL Financial’s Jeff Kleintop in his latest weekly market commentary.

The pattern is almost eerily similar.

“In both 2010 and 2011 an early run-up in the stock market, similar to this year, 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.”

We still have a few weeks before the end of April.  But until then, Kleintop is carefully watching 10 indicators that turned ahead of the sell-off.

Inflation expectations jump

'The University of Michigan consumer survey reflected a rise in inflation expectations in March and April of the past two years. 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%.'

Source: LPL Financial

Jobless claims spike

'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. So far, in 2012 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 underway.'

Source: LPL Financial

The volatility index (VIX) falls to 15

'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. 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.'

Source: LPL Financial

The current conditions index falls

'The LPL Financial Current Conditions Index (CCI) -- In 2010 and 2011, our index of 10 real-time economic and market conditions peaked around the 240 -- 250 level in April and began to fall by over 50 points. This year, the CCI recently reached 249 and has started to weaken and currently stands at 232.'

Source: LPL Financial

Oil prices jump by $15

'In 2010 and 2011, oil prices rose about $15 -- 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 -- 110 that they reached in April of last year. 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.'

Source: LPL Financial

The yield curve flattens

Unfavorable earnings revisions

'The first couple of weeks of the first quarter earnings season (April 2010 and April 2011) drove earnings estimates higher in both 2010 and 2011. Earnings estimates for S&P 500 companies over the next year rose a greater-than-average 3 -- 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.'

Source: LPL Financial

Consumer confidence tops out

The Citigroup economic surprise index peaks

Fed stimulus ends

'...The current program known as Operation Twist was announced on September 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.'

Source: LPL Financial

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