Monday, June 26, 2006

Follow Up On Sentiment

As I discussed a few days ago, some of the investment sentiment surveys are quite negative as of the recent global equity sell off. This had led many on Wall Street to predict a significant "bottom" is in on stock prices using sentiment as a contrary indicator. Their rationale is that sentiment is usually this negative after a significant decline. But in this market of swings one direction or the other lasting months instead of years, sentiment quickly becomes overly bullish or overly bearish, keeping the market range bound. At some point, we must break out of this range and sentiment will eventually not be a good tool to use for investment decisions.

It is not a good sign that investor sentiment is so negative just a month removed from four year highs in international and American equities. Another point to ponder is the University of Michigan Consumer Sentiment Survey courtesy of the Federal Reserve Bank. What is interesting though is that this survey was published before the stock markets started to fall. It was published on April 1, 2006. So, what did the consumer think with the stock market at four year highs? "Current conditions" had the biggest one month decline in the history of the survey. That is nearly thirty years. Given the consumer drives two thirds of the American economy, what does this mean? It's no guarantee but it might mean the consumer is underemployed or accumulating alot of debt or is being hurt by energy or is worried about their housing values. If any or all of these are the case, could consumers start to spend less and as a result slow the economy?

Notice the darkened horizontal lines. They are times of recession overlaid on the Michigan Sentiment Survey chart. Again, clicking on the chart will give you a larger view.

posted by TimingLogic at 9:02 PM