EWT on CONSUMER CONFIDENCE and MARKETS

Does a 3-year high in consumer confidence challenge your current forecast?
Category: Specific Markets

The Consumer Confidence Index has been rising over the last couple of months. Is it a lagging indicator of stock market trends? If so, then the strong June number released on Tuesday (June 28) must indicate that consumers are simply reacting to the stock rally since April... Although, doesn't this 3-year high in consumer confidence negate the likelihood of a "downside explosion that alters the face of the U.S. economy occurring over the next few months?" That's a quote from your June Elliott Wave Financial Forecast.


Responder: Multi-Author
Date: 6/29/2005
While these reports have no value in predicting price action beyond the span of a few minutes, an emotional reaction to these reports is often useful for timing a short-term entry or exit point in the market. Consumer confidence is indeed high right now. But here's a pop quiz: When did the all-time record high for consumer confidence occur? October 1968, with a reading of 142.3. Significant? You bet. The DJIA topped two months later (Dec. 2 at 994.60) and declined 36% over the next 18-months to a low in May 1970 (May 26 at 627.40). At the time, that decline in stocks was the largest percentage sell-off in well over 20 years. Yet how could that happen with the U.S. consumer so confident? Well, the markets are moved by mass psychology rather than cold, hard reason. You'll get frustrated if you expect mass psychology to be rational, so don't waste time trying to make sense of it. We don't see a serious challenge to our view of an ongoing bear market in recent economic reports. In light of what we currently see in the wave structure, reports like the June consumer confidence seem more consistent with a bear market rally than the beginnings of a bull market. Wave patterns in the stock market indexes are our primary sources of information regarding social mood. Economic reports are secondary, and as such are best used to confirm or challenge wave-based forecasts. We don't want to let positives in a secondary source take precedence over more substantive information coming from our primary source -- wave patterns. See The Wave Principle of Human Social Behavior for a detailed discussion of these concepts.