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Chart In Focus

Investor Expectations at Multi-Month Low

Chart In Focus
June 25, 2010

There are dozens of sentiment indicators out there for market analysts to use, and this week's chart introduces one you may not have ever heard of before.  The indicator in this week's chart comes from polling data gathered by Rasmussen Reports on economic confidence.

Rasmussen's web site states that the results of its polling on consumer confidence are similar to that published by the Conference Board, with the distinction that the Conference Board collects its data by U.S. mail.  So the Rasmussen data are typically 2-6 weeks ahead of the trends reported by the monthly confidence indicators.

Perhaps more importantly, Rasmussen divides poll respondents into categories of "investor" and "non-investor".  Nearly half of all Americans fall into the investor category, which is defined as people who own at least $5,000 worth of stocks, bonds, and mutual funds."  One might reasonably think that this group would be better attuned to the meaning of economic developments, and thus a better gauge of what the prospects are for the economy. 

But the reality is that these respondents tend to be much more reactive to the sorts of news events that help push the stock market up and down, and thus they are a wonderful contrary indicator for stock prices.  The data from the non-investor group tends to be quieter, perhaps because those individuals are not as tuned in to the sorts of news that drive the emotional fluctuations of investors.

In the chart this week, I show the Rasmussen Investor Expectations Index.  To help gauge where "high" and "low" readings are for this index, I have added a 50-day simple moving average plus Bollinger Bands set 1.5 standard deviations above and below that moving average.  Whenever this index has gone outside the bands, it has marked a temporary extreme of investor sentiment.

Right now, the poll respondents are at a multi-month low in terms of their expectations for the economy.  The prior time that this index went down below its lower band was at the market bottom in February 2010.  Other penetrations below the lower band have also marked meaningful bottoms for stock prices.  Perhaps even more interesting is that the current reading is even lower than its low a few days ago, despite the fact that the DJIA seems to be making a higher low. 

When investors are at a pessimistic extreme, it usually means that they have already done the selling that they are going to do.  And the rush from pessimism back to optimism usually triggers buying activity, which helps to push up stock prices. 

Tom McClellan
Editor, The McClellan Market Report

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