Ignore Consumer Confidence Right Now. Its Record Highs Are Misleading.

It’s easy to be fooled by the mainstream media, which is pumping positive headlines about Consumer Confidence.

The mainstream media always toes the line. And right now, it’s touting sentimental viewpoints in exclamatory prose, but it’s ignoring the facts beneath the surface.

Just take a look at what the Wall Street Journal is saying:

“US Consumer Confidence Hits Highest Level Since 2000,” it blared in a headline Tuesday morning. “Strong economy and robust job growth bolstered consumers’ sentiment,” said the subhead, in reporting on the Conference Board’s monthly Consumer Confidence Index (CCI).

And how about CNBC:

“Consumer Confidence Hits 138.4 in September, Vs. 132 Estimate,” it said in a similar headline.

But despite all these optimistic claims, there’s a little known secret about the CCI that most people don’t know, and it’s revealing a totally different story than what the mainstream media headlines are saying.

I share it with you here today…

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The CCI Merely Mirrors the Stock Market

The Consumer Confidence Index – or as I like to call it, the Con Con Index – has historically followed stock prices.

Consumers watch the nightly news for cues about what to expect. When stock prices are at all-time highs, so is consumer confidence. When consumer confidence plunges to record lows, it is because the stock market has plunged to a bear market low.

What I’m telling you right now is not rocket science. It’s not only business people and investors who take their cues from the stock market. It’s ordinary folks too, or as economists call them, “consumer.”

None of the mainstream media articles that have read on this release through the years have ever mentioned this important point. None even lightly touched on what this high reading might imply about stock prices.

So I want to share something that might actually help us, which the news reports will never give you – the historical perspective in graphic form.

Here’s an up to the minute chart of the index going back to 1990.  I have added a few editorial notations.


What this chart reveals is this:

The last time the Con Con was as high as its current levels was between January and October of 2000, which was the top of the internet/tech bubble of the 1990s. It was on the heels of a bull market/bubble that had lasted 8 years.

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So while the pundits are gushing over how great things look from here, they conveniently neglect to tell you that the last time things looked this “great” was really a great time to sell. It was a particularly great time to sell technology stocks.

Note also that the range the past 28 years is approximately 20 to 140.  Therefore the midrange is approximately 80.  In 2000, the index was 60 points above that midrange.

It reached the opposite extreme in February-March 2009. That was an all-time record low in optimism and thus a record high in pessimism. It was below the level of the 1992 bottom. It was even below the 1974 bottom (not shown) on the heels of the Watergate Scandal, stagflation, and Nixon resigning the Presidency.

So just as it looked to most consumers that the world was ending in 2009 was a great time to buy stocks. Just as the extreme high in 2000 was a great time to sell.

But perhaps even more stunning than this historical view of the CCI alone is a side by side comparison of it with the stock market.


Lo and behold, their directions, and changes of direction, are synchronized. It’s clear that consumers follow the stock market! If the market’s up, they conclude that all is well. If the market’s down, they conclude we must be going to hell!

Here’s what is even more amazing. The Consumer Confidence Index doesn’t only follow the stock market’s long term trend. As you can see from the trendlines since the 2009 bottom, CCI also follows the market’s intermediate twists and turns.

The Conference Board spends a lot of money to conduct surveys that pretend to tell us the consumers know something about the economy. All this index really tells us is that consumers follow the stock market.

The CCI Provides a Clear Takeaway – Sell Soon, and Sell Tech Especially

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The strong correlation between the CCI and stocks tells us that this is as good as it gets. The CCI is near its all-time record extreme.

The last time it was in this range was at the end of the great internet bubble of the late 1990s. That was a particularly bad time to be buying tech stocks. The NASDAQ dropped 80% from the level it reached then. And it took it 15 years to recover back to those levels.

Of course, back then, the NASDAQ was a completely different index. Many of the companies that were in the index in 2000 never made it. They disappeared. They were replaced by new ones that came along since 2003.  For many stocks, and the owners of those stocks, there was no recovery. They were wiped out.

These are among the things that Wall Street captured media pundits don’t tell you when they report nonsense like the CCI. Wall Street is, after all, a confidence game.

The most recent uptrend in the stock market and the CCI have now persisted for two years. It’s not the longest uninterrupted wave of this nature, but it’s getting up there.

More importantly, it’s getting “up there” in terms of the absolute level. Going back through the 48 years of history available to us in this index, we’ve only been at this level once before, in 2000. It was a generational selling opportunity in tech stocks.

Likewise, we’ve only been at an opposite extreme, an extreme of pessimism, once before.  That was the greatest buying opportunity in a generation.

And given the history of this index, there can be little doubt that there will soon be another generational sell signal.

The confirming sell signals have only come when the uptrend lines have been broken. This one is still rising.

If you have followed my advice, you are already largely out of stocks. If you are new to these pages, you can ride the wave for as long as the uptrend lines are intact, but the first sign of weakness should be the death knell for this bubble.

That CCI sell signal is coming. But by the time it happens the market will already have dropped sharply. Because the CCI doesn’t lead the market. It follows it.

In the weeks ahead, I’ll be watching the technical indicators for signs that it’s time to add puts on the SPY to take advantage of the profit opportunities in the downside ahead.

Sincerely,

Lee Adler

9 Responses to “Ignore Consumer Confidence Right Now. Its Record Highs Are Misleading.”

  1. Lee,

    I continue to appreciate the excellent analysis in your articles. It is interesting to see how long the insanity can go one before fundamentals actually matter again.

    In the chart where you show the CCI and the Stock Market below, it is interesting to note that the CCI doesn’t appear to have sharp peaks at the top. Instead, the CCI hits a top and sort of plateaus for a while before dropping. During those times, the market continues to climb for a little while. So it might be that the CCI will hit this recent high and then level off for a bit (months maybe) before the market drops. Is my observation valid from your perspective?

    Thanks,
    BC

  2. In 1961 my father,a brilliant international economist told me the entire western worlds financial system was one of SMOKE AND MIRRORS,nothing REAL underpinning ANYTHING,he didnt understand what was holding it together minute by minute,and in MY LIFETIME I would see events that would make the souplines of the 1930s look like a walk in the park.Well in that day the DJIA was 300.Now it is pushing 30,000.

  3. Lee, today may be the final nail in the coffin. Peak with news item….a few days ago I told you break below 2900 as your trendline showed is key…..I told you I had a strong up one last time this week. BUT when it closed back under 2930 from NOT getting through the December futures price of 2941 that gives ME the first big sell signal in over 10 years….top in late september at 2950 area is it…keep up the great work, best regards, fred cleaves

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