Stock markets – keep an eye on confidence measures

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It is important that confidence be restored for the recent stock market gains to be more enduring. A few comments regarding this issue are highlighted in this post.

As shown in Sunday’s “Words from the Wise” review, there is a strong historical relationship between the US Consumer Confidence Index and the 12-month change in the S&P 500 Index. One needs to take a view on the direction of consumer confidence, but should it for argument’s sake pick up from 30 to 40 by the end of June, the relationship indicates a S&P 500 decline of 30-35% in year-ago terms. Using end-of-quarter prices, this means an Index at between 832 and 896 by mid-year.


Source: Plexus Asset Management (based on data from I-Net Bridge)

Interestingly, a report from Franklin Templeton Investments has just arrived, also showing that when confidence was low in the past, it had been time to buy. For example, on average, stocks returned 12.5% a year following consumer confidence of 66 or lower. The consumer confidence reading at the end of February was 25.


Another confidence indicator worth monitoring, is the Barron’s Confidence Index. This Index is calculated by dividing the average yield on high-grade bonds by the average yield on intermediate-grade bonds. The discrepancy between the yields is indicative of investor confidence. There has been an improvement in the ratio since its all-time low in December, showing that bond investors are growing somewhat more confident and have started opting for more speculative bonds over high-grade bonds.


Source: I-Net Bridge

Not surprisingly, a strong historical relationship also exists between the Barron’s Confidence Index and the S&P 500’s 12-month rate of change. But unlike consumer confidence that has not yet bottomed, the Barron’s indicator has already been working its way higher over the three months.


Source: Plexus Asset Management (based on data from I-Net Bridge)

As mentioned before, taking one step at a time, the next hurdle is the release of potentially ugly earnings and guidance announcements in April. By then a clearer picture should also start emerging on the results of the Fed’s medicine and whether credit markets are thawing and confidence is beginning to improve.


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4 comments to Stock markets – keep an eye on confidence measures

  • […] Stock markets – keep an eye on confidence measures […]

  • The rally just ending is not enduring. The technical structure, called a Diagonal Triangle, (Diag >) indicates a dramatic reversal, once we take out the old low. Given the jittery market, we will likely have a panic bottoming. But once we do, we swiftly bounce right back to the current level in stocks and continue higher in the Mother of all Rallies headed for the final Market Orgy and Bubble Top. Although a Bear Market Rally, it should be one of the fastest markets of all time, record Monetary Stimulus = Record Euphoria. As always, Bear market Rallies are concentrated in a small group of stocks: this time the Dow 30 and the Russell 2000 are the index winners. Returns on the S&P and NASDAQ will be pale by comparison. The S&P can only make a triple top at the most, while the NAZ was the first bubble to burst. Like lightening striking twice in the same place – highly unlikely, given the biggest buyer of tech has traditionally been the Financial Industry, highly illogical. GOLD is peaking NOW in a bubble about to burst. With stocks exploding likely within the month, gold has lost its glitter for the next 3 years, minimum. The DOLLAR, although on a longterm uptrend, must retrace to at least 73 on the Dollar Index. It will then begin its stratospheric trajectory along with stocks. Within 18 months likely 1:1 with the Euro, overtaking it by 2011. Corporate bonds will be topping longterm, concurrent with the trough in stocks. Bonds now become the riskiest of investments for capital losses.

    Eduardo Mirahyes

  • Frank W

    This information is very interesting. Some months back a couple of academics did an analysis of the relationship between consumer confidence and consumer behavior in terms of retail buying. They found that there was none. There was no relationship either in terms of current buying or future buying.

  • William Burkhart

    The fundamental underpinning of any “con” is gaining and keeping the confidence of who you are going to fleece. Since the U.S. monetary system and financial markets are finally coming unraveled and exposed for what they truly are–one big con, it should not come as any surprise that we are so interested in confidence measures. Sadly, people are still gullible enough to think that they are not getting conned by the bankers and politicians, hence the rise in “con”fidence!

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