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
March 12, 2015
June 15, 2012
May 26, 2011
August 12, 2010
October 12, 2006
February 28, 2006
August 13, 2004
Historically, the Citigroup Economic Surprise Index fell below -55 when:
- The S&P was in the midst of a rally. In these cases, the S&P began a small correction within 4 months.
- The S&P was in the midst of a correction.
- 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.