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Consumer Confidence Rebounds: Bullish Or Bearish? at Trader’s Narrative





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After reaching an all time low in January 2009, the Conference Board Consumer Confidence Index reached an all time low (again) in February 2009.

Although we haven’t seen such a dramatic fall in this metric for 42 years, historically, such troughs are signs of the coming of better times in the stock market. In fact, along with several other variables, gloomy consumer sentiment is one of the handful of conditions of a new bull market.

Now we are seeing an almost equally forceful recovery with the latest Consumer Index data from the Conference Board:

consumer confidence index May 2009

The last time we saw this kind of jump in the Consumer Confidence was in early 2003 - coinciding with the bear market’s end. The stock market certainly cheered when the surprisingly higher number was released by the Conference Board on Tuesday. And it is confirmed by other sources like the Gallup poll of US consumers showing a marked improvement since February 2009:

gallup consumer mood poll
Source: Gallup Consumer Poll

So the question is, is such a sharp recovery in consumer optimism bullish for the market? or bearish?

In a recent column, Mark Hulbert argues that it is bearish. He compared the index with subsequent stock market returns (month, quarter, year, and 2 year periods). The relationship Hulbert found was an inverse one, where falls in Consumer Confidence lead to rallies in the market (and recoveries in Confidence lead to lower returns in the stock market). Given the contrarian nature of the crowd, this isn’t surprising.

But it isn’t the whole story.

James Stack, editor of the InvesTech newsletter and Jason Goepfert of SentimenTrader both focus on something entirely different. The Conference Board releases several different sub-sets of data. The one most people concentrate on is the Present Situations number but there is also the Expectations Index, which asks the respondents to look ahead to 6 months in the future:

consumer confidence expectations index May 2009

They both keep track of another variable: the Expectations minus the Present Situation Index - in other words, the difference between how consumers think they will fare in the future and how they are doing right now. And interestingly enough, this net variable is actually positively correlated to the stock market - and a leading indicator.

I highly recommend both sources. To see the net Confidence chart take up their free trial offers:

You can get a free 14 day free trial of SentimenTrader.

And you can get a free sample of InvesTech’s newest report here.

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6 Responses to “Consumer Confidence Rebounds: Bullish Or Bearish?”  

  1. 1 Paul

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    Babak, are you suggesting this market will be like 2003, no real pullback as Expectations - Presenst is positive? I am preoccupied if a 5% correction has been enough for this new “bull” market to go higher from here? This new “bull” feels like having an invisible hand.

  2. 2 Paul

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    Babak, who is buying in this new bull market and pushing S&P low volume up 12 points within 15 minutes to close? Another similar push will go above 930 and a breakout? It looks similarly pretty easy to go to 1,000 in 6 more days?

  3. 3 Paul

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    Babak, I found what I was looking fo and share it with you. The move was violent and the SPX futures market, the most liquid market in the world, too got overwhelmed. Though the closing print on the SPX (cash) was 919.14, the ES futures traded all the way up to 927.75 at 4:00PM. The chatter is that there was an order to purchase 2500 contracts of the SPX futures at close entered by a single dealer (JP Morgan according to some). This corresponds to a notional value of $575 Million dollars. This resulted in all the offers to sell between 914 and 927 to be hit. This also triggered a lot of stop orders to buy, adding to the stampede. Unnatural Market Action: Window Dressing or Something More? There is some speculation that there was an effort to prop up the market into the close to ensure a finish close to the high levels of the month. It is very odd for a major dealer to wait till the close to enter such a large order especially on a Friday which happened to be the last trading day of the month. Liquidity tends to be less near the close on Friday as many traders and desk square out their positions before the weekend.
    We are living in an era of significant government intervention in the financial markets. What some call market intervention for the greater good, others call market manipulation. It is not clear what happened today, but it was certainly not normal.

  4. 4 Paul

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    Babak, if it is true a dealer spikes the market to close 920, there could be a set up for a breakout play to 940 plus. This dealer will make a lot of money and this cycle can be repeated.

  5. 5 Paul

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    Babak, if this Unnatural Market action continues and it has and I think it’s very obvious from 5/29 close, the market is controlled until these people change course and nothing will work.

  6. 6 Babak

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    Paul, the market is the market. Yes the ramp up was very strange but nothing novel really. I do expect us to head lower before putting in a definitive bottom but I think we’ll maintain the previous low in March.

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