Is the Economic Surprise Index signalling a correction for the S&P 500?


Over the past few months, U.S. economic data has continued to miss expectations. I wrote that the recent “weakness” cannot cause a significant correction or bear market. Our model confirms this: the U.S. stock market is still in a “big rally within a bull market”.
A month ago, we did a study which demonstrated that a declining Citigroup Economic Surprise Index (which aggregates beats/misses vs economic expectations) cannot cause a small correction in the U.S. stock market. However, the Citigroup Economic Surprise Index has deteriorated significantly since then. On May 18 the index stood at -33.6. As of June 14, it stands at -57.3.
*Fluctuations in the data vs. expectations are a normal part of economic expansions.

So the question is simple. Has the Economic Surprise Index deteriorated enough to cause a 6%+ correction in the S&P 500? Let’s examine historical cases in which the Index fell below -55.
*We’re only looking at bull market cases because this is still a bull market.

February 4, 2016

The Economic Surprise Index fell below -55 one day before the S&P began its final down-leg of this significant correction.

March 12, 2015

The signal came out approximately 3 months before the S&P topped. Then it began a significant correction, which our model predicted in April 2015.

June 15, 2012

Interestingly enough, the Economic Surprise Index reached -55 after the S&P bottomed. The S&P made a 10.9% “small correction” from April 2 to June 6, 2012.

May 26, 2011

The signal came out during the first leg of the May-October 2011 significant correction.

August 12, 2010

Once again, the signal came out after the S&P’s significant correction of 2010 hit bottom.

October 12, 2006

This signal came out in the midst of a strong rally. The S&P’s next “small correction” was more than 4 months away. The S&P began a 6.6% “small correction” on February 22, 2007.

February 28, 2006

2.5 months after this signal came out, the S&P began an 8% “small correction”  on May 8, 2006.

August 13, 2004

This signal came out right at the bottom of the S&P’s small correction. The S&P made an 8.8% correction from March-August 2004.

Bottom line

Historically, the Citigroup Economic Surprise Index fell below -55 when:

  1. The S&P was in the midst of a rally. In these cases, the S&P began a small correction within 4 months.
  2. The S&P was in the midst of a correction.
  3. The S&P had already made a small correction.

Obviously the 3rd case doesn’t apply right now. The S&P has yet to complete a small correction. However, this confirms our idea that the S&P will began a small correction by October 2017.

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