We've been showing you the internal condition of the stock market's deterioration since November of last year, but it has been so gradual that it has worn out investors. When they get tired, they get somber or numb, and that is where we find ourselves this morning. We saw anecdotal headlines this morning that somewhat describe this underlying emotion, as Charles Schwab reports that they have had the first client asset outfolows in 10 years. That sounds like numb to me - the "giving up" stage.
Along that line of investor psychology, what we believe to be the best of the consumer sentiment indicators - the University of Michigan Consumer Sentiment - is currently plodding along at about 72. As you can see in the chart from Calculated Risk below, this indicator is usually in the range of 55 (at severe recession troughs) to about 100 or higher (in the heydays).
Click to view larger image.
We've shown you in the past that when this indicator of consumer sentiment drops under 65, it has historically produced massive bull markets in its wake. Our study that we produced in May 2008 showed that any downdraft after 65 (on the chart above) produced gains in the market of 20% on average in the following 12 months. Of course, the Lehman downdraft delayed the historical schedule this time, but the Consumer Discretion sector and the overall stock market have more than made up for it in the following 15-18 months.
While you can see that the consumer still has a long way to go, we are heading in the right direction.
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