Fri 17 May 2013
When it comes to investing, it is difficult to accurately predict the future. Most of the technical tools used by investment analysts are considered trailing indicators. In other words, they try to forecast what will happen by looking at what has already occurred. Sometimes that works well. Other times, the outcome is unexpected.
Most technical and fundamental analysis focuses on the price and movement of an investment. Things like price and volatility are known, measurable quantities. As a result, there is data that can be studied and dissected.
Many—if not most—investors, however, are emotional rather than analytical. They make investment decisions based on how they feel. As a result, it can be difficult to predict what they are likely to do.
More than 60 years ago, economists at the University of Michigan created a tool called the “consumer sentiment index” that tries to measure intangible investor emotions. They came up with a series of questions and once a month there is a random telephone survey of at least 500 people across the United States. In 1964, the index was normalized to have a value of 100.
The May consumer sentiment rose to 83.7 from 76.4 in April. It was the highest reading since July 2007. Economists were anticipating a May reading of 78. The increase in the index means that consumers are feeling better about the economy. That means they are likely to spend more money.
Unlike most technical tools, the Thomson Reuters/University of Michigan Consumer Sentiment Index is considered a leading economic indicator. The rising index is positive for the stock market. It means that the market gains seen since November are likely to continue.
The chart below shows how major indices fared over the past month. The Nasdaq is currently leading the group with a gain of almost 9% in the past four weeks. Even the Dow has gained almost 5% in that same period and many major indices are at all-time highs or at least at multi-year highs.
As we have noted for several weeks, technical indicators are all strongly positive for stocks. This news about the unexpected jump in consumer confidence should be welcomed by investors who are worrying that the current advance is getting overextended.