Friday, October 31, 2008

Conference Board Consumer Confidence Index as a Contrarian Indicator?

This Wednesday's Wall Street Journal had a graph of the Conference Board Consumer Confidence number on its front page.

It jumped out at me as soon as I saw it: it looked like it had potential as an excellent contrarian indicator, and was reminiscent of technical analysis oscillators such as stochastics.

I dug up a 40 year log graph of the S&P 500 overlaid with the Consumer Confidence index, and extended it to now using the most recent data. It seems that when we're talking about investment timescales (holding periods of say 1 year or more versus trading timescales of under a year), when consumer confidence is at historical lows, it seems to signal market bottoms and excellent periods for accumulation, whereas when consumer confidence is at historical highs, as it was in mid 2007, it seems to signal market tops and excellent periods for selling.

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