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April Showers: Another Springtime Correction Ahead?


There's an old adage that goes, once bitten, twice shy, which implies that we humans are quick learners. Hurt us once and we'll be on guard to make sure it doesn't happen again. But what if it not only happened again, but a third time too? You'd think even the slowest among us would be able to pick up on the fact that there's a problem.

That's exactly what we are up against as we turn the calendar and head into April with a full head of steam and some nice year-to-date gains for the fourth consecutive year. The problem, as LPL Financial's chief market strategist Jeff Kleintop explains, is that the past three Aprils have all marked the starting point of corrections.

"We look at these 10 indicators that each of the last three years preceded the downturns," Kleintop says of his latest research note. "They were signals, indicators, that a downturn was coming."

In case you've forgotten, he writes that April 23, 2010, April 29, 2011, and April 2, 2012, were peaks that were followed by 10-19% losses.

"We're watching them closely again," he says, noting that half are signaling something you ought to watch out for now, whereas all ten were flashing warnings in the prior three Aprils.

Among the red flags he's watching this year, Kleintop says falling consumer confidence got a little bit too high and is starting to decline. "We can see back to the spring of the past 3 years that "confidence peaked and then really saw a sharp pull back."

Similar warnings are also coming from the Volatility Index (^VIX) right now. With Volatility sitting at multi-year lows, Kleintop says it's "a little bit of a red flag" that markets have gotten a little too complacent.

And finally, he says earnings estimates for the 3rd and 4th quarters are "still way too high" and will be coming down, adding that it's hard for stocks to go up when estimates are coming down.

While the previous three Aprils have marked the start of something gloomy, Kleintop's outlook is far less dire this time around, leading him to predict a decline in the 5-10%.

Even so, he cautions investors "not to get too greedy" waiting for a sharper correction.