‘Buy’ Signals Flashing With Plunge in Confidence
John Dorfman of Bloomberg reporting:
Ned Davis Research Inc. in Venice, Florida, studied returns for the Dow Jones Industrial Average when confidence as measured by the Conference Board survey is high, medium and low.
When it is high (above 113) the Dow gained an average of only 0.2 percent over the next 12 months. When confidence is moderate (between 66 and 113) the index gained 5.9 percent.
The biggest gains came when confidence was low (66 or less). Then the Dow plowed ahead by an average of 13.1 percent.
Why is consumer confidence a contrary indicator for stocks? When confidence is low, many people have withdrawn from the stock market, whether because of fright, disgust or simple lack of funds to invest. Lots of cash is on the sidelines, and that cash is potential fuel for a rally.
When confidence is high, many investors have already committed much of their capital to stocks, and there is little left to fuel the fire.
The above research is getting a lot of internet buzz today.