Citigroup US Economic Surprise Index About to Turn Positive – Means Stock Market Goes Up?

As you know from my weekly dashboard of indicators, I like to follow the Citigroup U.S. Economic Surprise Index.  (Easy Intro on this indicator here)  It looks like this index is about to turn positive for the first time since April 29 earlier this year.  If that were to happen, it would mean that economic reports are generally coming in better than expected.  What happens at that point with respect to the stock market?

I decided to examine every instance where the Citigroup U.S. Economic Surprise Index crossed above the zero mark since the financial crisis hit in late 2008.  I did not include those instances where it dropped back below zero again in a few weeks or less.  There have been five such instances.  Here is a look at those dates, along with what happened to the S&P 500 over the next month after the cross occurred:

Good news!  The S&P 500 was up a month later in every instance, including more than 2.5 percent in all but one case.  One limitation to this analysis is that the S&P 500 was moving upward pretty aggressively in much of 2009 and 2010.  To put things in a little better perspective, below you will see a chart of the four months surrounding the crossover events – two months prior and two months after: (red arrows represent the date that the Citigroup index crossed above zero)

Source: Yahoo Finance

It doesn’t appear that the crossover event always coincided with any particular point in the cycle of the S&P 500 rise or fall.  In most cases, there was a slow and steady rise for 30 days or so before the crossover.  There doesn’t appear to be a clear pattern to what happens after.  Sometimes the S&P 500 levels off, and others it increases slowly – but never has it decreased steadily.

What I take away from this is that it’s probable the key turning point has already taken place prior to the crossover of the Citigroup U.S. Economic Surprise Index from negative to positive.  I’d have to do the same analysis for when the index turned upward from a downward trend to see if that coincided with anything in the S&P 500 movements.

Easy Take

In the grand scheme of things, there hasn’t been a very clear relationship between the time when the Citigroup Economic Surprise Index turns positive and what happens to the S&P 500 index.  It is possible the surprise index’s cross above zero is a lagging indicator for what’s happening in the market.  Perhaps in the future, I’ll do a similar analysis to look at when the surprise index turns upward from going downward.   The good news is that, if the recent history of this specific relationship is any guide, don’t expect the S&P 500 to lose ground over the next month or two.

Related posts:

1. Economic Indicator Roundup: Adding Citigroup Economic Surprise Index – United States
2. Economic Indicator Roundup: Consumer getting stronger? Citigroup Economic Surprise Index stable?
3. Economic Indicator Roundup (August 29, 2011)
4. Economic Indicator Roundup (September 5, 2011)
5. Economic Indicator Roundup: More Evidence the Economy is Slowing or Contracting (September 12, 2011)