• Confidence Is Low And Why That Is Bullish

    by  • July 30, 2013 11:28 am • Broad Market Analysis, Lighter Side, Quick Hits • 8 Comments

    Here are two very interesting sentiment based polls that show people are no where close to as optimistic as they were at previous major peaks.

    First up, the Conference Board’s Consumer Confidence Index came in at 80.3 in July.  Sure, this is up from the depths of the financial crisis, but what I find amazing is it is no where close to previous peaks going back 13 years.  In 2000, this peaked at 145 and then in 2007 peak near 110.  From a much bigger term perspective, I find this to be very bullish for stocks, as there is a lot of room for confidence to enter the picture.  When everyone is bullish and happy, that is when you worry.  We aren’t there yet.

    The logical question is why is there such an amazing disconnect?  I think it comes down to jobs, wages, and the economy haven’t come back as much as anyone would like.  This is why people don’t ‘feel’ as good about things.  Lastly, everyone remembers the last crash and in the back of their minds they are more naturally skeptical of things here.

    Next up, the Yale School of Management has a poll they run that asks individuals and institutions how unlikely a stock market crash over the coming six months is.   (Note – the lower the Index is, then the more worried over a crash people become, and vice versa on high readings)

    Again, this is well off the lows we saw a few years ago, but no where close to the confidence we saw back in 2006 and 2007.  In fact, from the individual point of view, there is as much worry over a crash currently as what we saw near the 2003 lows!  That is simply amazing and hammers home just how skeptical the masses still are over this move to new highs.

    Near-term anything can happen, sure.  Yet, from a longer-term perspective I find things like above to be fascinating and potentially very bullish for equities going out longer-term.  Once everyone is confident and no one is expecting a crash, that is when we probably crash.  Fortunately, we aren’t anywhere close to that currently.

    About

    8 Responses to Confidence Is Low And Why That Is Bullish

    1. Conservative Not Republican
      August 12, 2013 9:06 pm at 9:06 pm

      I think a lot of people know that the Fed is propping the markets up. Whether they are active in taking care of their retirement funds and investments or not, I think many insticntively understand the markets do not reflect the reality of the economy, regardless of whether they understand the mechanics behind it or not. They have no confidence because what they see and feel on Main Street, is not the fantasy they see being played out on Wall Street. Let’s let the Fed get out of the market manipulation business and see what the markets do once the sugar daddy takes away the candy. If they stay pretty close to where they are without Bernanke and Co. throwing 85 billion dollars a month at the markets, then the people will start having some confidence again, but not until the jobs market also comes back. With Obamacare in the wings, many people are fearful of what that will cause too.

      I’m in the markets, but I watch them daily and very closely. Most people either don’t have the time or desire to do that. Since they got burned last time, many are on the sidelines and will stay there until what they see on Main Street and what they see on Wall Street aren’t so disconnected. As I said, I’m in the markets, but everytime someone from the Fed gives the slightest hint of consideration of cutting back of any kind, the markets react pretty strongly to the downside. That is all the proof one needs to understand that the current actions of the markets, (given no other outside influence of any major consequence, such as a terrorist attack or financial collapse of a Greece, or a Spain), are dependent on the Fed.

      Many seem to think next month will be when the long awaited cut back announcement comes. Personally, I think it will probably be sometime not to long after the next Fed Chairman is confirmed. Bernanke is just like any other politician. He doesn’t want a crash tarnishing his legacy, even if he knows that it means hanging the next Fed Chariman out to dry so that the new Chariman has to take care of his incompetence.

      I’ve also got a hair trigger, as do many. If I see any hint that the announcement may come next month, I’ll be heading for the exits. So will lots of others and Bernanke is acutely aware of this. When it is all settled down, then I’ll be looking for a re-entry point, but not until then.

      • Ryan Detrick, CMT
        August 13, 2013 11:06 am at 11:06 am

        Thanks much for the thoughts!

        Definitely a lot of opinion on how much the Fed is keeping things up or not. One note is SPX earnings are at all-time highs. I just don’t see how the Fed could be totally behind that.

        Thanks again and take care.

    2. rk
      July 31, 2013 10:49 am at 10:49 am

      Ryan, Most of the charts and data that you present points to more gains in the equities. Yet WSJ indicated that Russell 2000 is trading at 18.5 times forward earnings which is expensive by any standards. What gives? Is it a necessary condition that people have to get very bullish before a pullback?

      • Ryan Detrick, CMT
        August 6, 2013 2:50 pm at 2:50 pm

        I’m not a big valuations guy, as they’ve missed most of this rally. But I do feel we need to see more bullishness before we see a meaningful pullback. What I’d want to see is some weakness and excitement about buying a pullback.

        Anymore we have a pullback and every freaks out we’ll see a 15% drop in a week. That fuels the next round of buying.

    3. Brandon Gilkey
      July 30, 2013 1:46 pm at 1:46 pm

      My question is about your article on short interest the other day…with such a large short interest does that generally translate to moves lower not having enough momentum to keep going because there is so much short interest out there already?

      • Ryan Detrick, CMT
        August 6, 2013 2:52 pm at 2:52 pm

        The easiest way to put it is a lot of short interest usually can = volatility. Now we’ve found the trends in short interest have been very meaningful, but still nothing always works.

    4. July 30, 2013 12:21 pm at 12:21 pm

      The explanation given is not necessarily the case. After the Great Depression the general population swore off stocks. There was no real obsession with the stock market again (like in the late 20′s) until more than one full generation later. That is what you are seeing today. Great rotation? Yes, from bonds to cash (everything was in cash during the Great Depression). You can see this in the chart also, as the 2008 peak in consumer confidence was a good 20% lower than the 2000 peak… it is safe to extrapolate another 20% down (draw a line) and we are near that level now.

      Deflation cannot be fixed with monetary policy along–Japan was the ultimate proof of that. Structural fixes are needed, and you don’t get that in the 1st year of a Presidential cycle as I believe history has shown. We certainly haven’t seen it the past 5 years now under current Washington leadership.

      • Ryan Detrick, CMT
        August 6, 2013 2:53 pm at 2:53 pm

        Interesting points of view. Thanks for sharing!

    Leave a Reply