Waning Consumer Confidence Might Sink the Stock Market

Consumer confidence dropped 7% in September. That could presage a market top.

Consumer confidence dropped 7% in September. That could presage a market top.

Consumer confidence is falling—and that means the stock market might be ready to drop as well.

Every month, the Conference Board releases its monthly reading of consumer confidence. September’s data was released on Tuesday. The latest reading was 125.1—a 7% decline from August’s 134.2. This sharp monthly decline generated a rare Sell signal in my work. The accompanying chart will illustrate why.

From the chart, you can see that the Consumer Confidence Index pierced a 6-1/2 year uptrend from the January 2013 low. Each time that the index trended higher for at least four years and then broke an uptrend, the trend turned down.

The price structure of the confidence index shows a “rounding top.” For almost two years, the Index made slightly higher highs, and then began to turn down. The Sell signal would become a strong Sell signal once the Index declines below 121—this year’s January low. Breaking the January low would be bearish for two reasons. It would be a break a prior low, and it would be a decisive decline below the 34-week moving average.

What are the investment implications? Sell signals in the Consumer Confidence Index have an excellent record of preceding important tops in the stock market. Just look at what happened with the Sell signals in 1989, 2000, and 2007. Bear Markets followed each Sell signal. A decline below 121 (the January low) would be a bearish signal for the stock market. The S&P 500 has gained 19% in 2019, while the Dow Jones Industrial Average has risen 15%.

Why is this consumer confidence important for the economy? According to the Bureau of Economic Analysis, consumer spending accounted for 68% of the U.S. economy. So when consumer confidence drops, consumers spend less.

It will be critical in the coming months if consumer attitudes will be effected by the impeachment inquiry. If consumers become less optimistic about the economy, then they would curtail their spending. And that could lead to an economic slowdown.

Andrew Addison is the author of THE INSTITUTIONAL VIEW, a research service that focuses on technical analysis.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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