A 12-Year Breakout in the Making
Market trends come in all sizes.
You can find breakouts and breakdowns on monthly, weekly, daily — and even five-minute charts. Depending on your timing and trading goals, you could exploit every one of these trends, no matter how big or small.
Today, I’m going to take a step back from the ebb and flow of our usual daily charts. Instead, I’m going to take a look at a much larger trend. Until recently, this trend had been in place well over a decade, contributing to the stock market’s poor performance since the dot-com bust.
However, a recent breakout could be the first signal that a powerful reversal has been triggered. And if the breakout holds, we should begin to see very different opinions emerge about the state of the markets, the economy and our collective investing future…
It all comes back to the “peak pessimism “idea we’ve devoted so much space to over the past several months. For the uninitiated, peak pessimism is all about sentiment — or how investors feel about the market and their economic livelihood.
In a nutshell, negative sentiment is topping out at extreme levels this year. Analysts continue to call market tops and forecast lower earnings. Investors are fleeing stock funds in record numbers. And the media continue to parrot the “death of equities ” theory. Stocks are finished (for good). This is the new normal, they say, so get used to it.
Or is it?
Last weekend, I told my premium readers that we might be witnessing a light at the end of the tunnel. Through the dense fog of negative news, we’ve noted that consumers are beginning to feel differently about the economy. They’re starting to feel better about their prospects.
Consumer sentiment numbers came in last Friday morning at their highest level since September 2007. If you’re keeping score, that date was right between a collapsing housing market and the credit crisis. After five long years of free fall, Joe Consumer’s outlook is brightening. His house isn’t losing value every month. He’s earning a steady paycheck. Either way, he’s starting to realize that things aren’t as bad as the financial media would like him to think…
These consumer sentiment numbers aren’t making news highs. Far from it. But what they did show us is a significant breakout of a “sentiment downtrend” that has been in effect since 2000. Take a look:
Consumer sentiment began its long road to the basement in late 2000. The indicator recovered a bit in 2003-2004, yet began to diverge from the overall market leading up the 2008 collapse. It wasn’t until earlier this year that sentiment levels began to rise significantly from 2009 and 2011 lows. With last Friday’s release just above 83, we now see the first break of the sentiment downtrend that has remained intact for more than 12 years.
So why is this break important?
Remember, despite the market’s rapid rise after the 2008 collapse, trading volume has yet to recover to pre-crisis levels. Frustrated with the market’s consistently terrible performance, retail investors packed up and left.
These shifting sentiment numbers show us that investors could be closer to embracing risk than most market watchers previously thought. And while data like consumer sentiment doesn’t offer us direct trading signals, it can be helpful in confirming some of our ideas regarding the outlook on the overall market. Only time will tell if the lost decade is truly behind us. But if these numbers are any indication, we’re closer to recovery than you might think.
Greg Guenthner, CMT
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