Last month Consumer Confidence dropped by the most in three years as the survey results created several concerns from economists as the “35 to 54 years age group” had the biggest drop in confidence. That survey was conducted just a few days before the FOMC acted to cut rates.
The bullish % from the American Association of Individual Investors (AAII) was 50.8% the week before the report and moved generally lower with last week’s reading of 37.3%. The September respondents had raised their inflation outlook and lowered their expectations for the job market.
Over the past 40 years, I have found it quite beneficial to use technical analysis to analyze fundamental reports like the Index of Consumer Sentiment University of Michigan which I monitor along with Consumer Confidence.
The Consumer Sentiment had its recent low in 2022 when it dropped to 50 before starting a new uptrend, line b, that was supported by the twin lows in 2023. The downtrend, line a, was overcome in late 2023 consistent with improving Consumer Sentiment.
The July reading at 66.4 reaffirmed the uptrend and I concluded last month that the “economy will improve as we get closer to the election. The latest report comes out this Friday and I am not sure that this one data point is significant.”
Last week’s reading of 70.5% was above the estimated reading of 69. A reading above 72.47 would be above the 20-week EMA which already shows a positive trend.
Though also only one month’s data the latest Consumer Confidence has some interesting new data that offset many of the negatives from last month’s report. According to Dana M. Peterson, Chief Economist at The Conference Board it was the “strongest monthly gain since March 2021, but still did not break free of the narrow range that has prevailed over the past two years.”
As for stock prices over the next year, 51.4% expect them to be higher which was “the highest reading since 1987” and only 23.6% expected them to decline. Also, recessionary fears declined as consumers were generally more optimistic about future business conditions.
The monthly technical outlook is also positive even though the broadly based NYSE Composite is currently down 0.40% this month. The chart going back to 2020 shows the completion of a flag formation, lines a and b, in December 2023. The initial chart target derived from the formation in the 18,500 area has been met with additional targets above 20,000. The monthly starc+ band is at 20,649.
The NYSE Composite is trading well above the rising 20-month EMA at 17,494. The NYSE Stocks Only Advance/Decline line last moved above its EMA in December 2023. It then overcame the multi-year resistance, line c, in January 2024. The NYSE All Advance/Decline line overcame its EMA in October and then the resistance, line d, in December.
I expect that the consumer will get more optimistic as we head into 2025. This combined with the bullish readings from the advance/decline lines favors the stock market. For those worried about a new bear market like the one that started in 2007 one should remember that the A/D lines first peaked in May 2007. They then formed lower highs and significant bearish divergence when the stock market averages peaked in October.
The fact that the weekly and monthly A/D lines have not yet formed any divergences indicates any sharp decline should set the stage for the resumption of the overall uptrend and more new market highs are very likely.