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Extremely Pessimistic Consumer Sentiment Is Bullish at Trader’s Narrative





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The most recent consumer sentiment numbers from Reuters and the University of Michigan show an extreme pessimism. To be exact, in October, the “current conditions index” dropped to 91.0 while the “expected index” fell to 64.7 — the lowest since Hurricane Katrina.

We haven’t seen numbers like these since 2003 when the bear market gave way to the current bull market. Other than 2003, we’d have to go back 15 years to find a similar consumer sentiment reading.

Now that is extreme. And yet, from a contrarian point of view, comforting. That’s because consumer sentiment is a lagging indicator and by the time extreme pessimism has seeped into the masses, a new horizon shortly appears and the darkness is dispelled. Check out these graphs of the Michigan Consumer Sentiment and you’ll see what I mean.

According to a research study by Meir Statman, a finance professor at Santa Clara University and Kenneth Fisher of Fisher Investments:

Low consumer confidence is followed by high stock returns more often than it is followed by low stock returns.

Although it is extremely difficult to go against the crowd, the best time to buy is when there is “blood on the streets”. With consumer confidence this low the retail sales could be a disaster — although you wouldn’t guess that from the crowds on Black Friday.

The technical indicators (new lows relative to new highs) are aligning and now sentiment is falling into place.

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2 Responses to “Extremely Pessimistic Consumer Sentiment Is Bullish”  

  1. 1 LP

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    Babak,

    While it maybe true, it would be better if the extreme sentiment occurred after a major downturn. Unfortunately, we have not experienced a major downturn yet, the dollar still continues to slide, these subprime issues are not even close being resolved and oil seem to running away and could be unpegged from the dollar. Had this extreme reading occurred after a stabilized dollar and housing market, I would run out an buy everything under the sun. But for now, I think there will be much more blood on streets, and it would be more prudent to wait for a typical correction at least, this way you know that you are buying at a lower cost basis.

    LP

  2. 2 Babak

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    LP, yeah, I know what you mean, but things don’t always play out perfectly according to script.

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