Understanding Contrary Indicators

Yesterday, I mentioned in passing a fabulous cover story from a 1962 Time magazine. While these sorts of contrary indicators are subject to interpretation, they are worthwhile to those who can properly interpret them, as they can provide insight that is not readily available elsewhere.

I have been tracking these sorts of signals for many years. In 2003, I published a research piece, titled Contrary Indicators 2000 – 2003 Bear Market. I thought it was important to remind people that, despite the fact the market had been shellacked, there were plenty of signs of a major bullish reversal that could be followed by tradrs, fund managers, and investors :   

"Astute observers of Human Nature have learned to detect the many “Contrary Indicators” on display throughout this crash. Traders who learn to use these contra-signals are better able to deploy capital, manage risk, and anticipate market reversals. 

Anyone who manages assets for a living can garner a tactical advantage by learning to properly identify and employ these Contrary Indicators: They can be used as timing signals as well as help determine an appropriate investment posture (i.e., aggressive or defensive); Even for the least technically minded, they have value as risk management tools." 

That these indicators exist for both bullish and bearish extremes points to their agnosticism. However, these are easily misinterpreted. In this week’s Barron’s The Trader column, Kopin Tan discusses a specific JP Morgan research piece, which misuses a sentiment indicator, the Conference Board Consumer Confidence readings:

"Some of you, of course, are miffed at how Wall Street is banking on your largesse even as they trade your pain. The Conference Board said last week that consumer confidence sank to the lowest in 16 years. Your confidence has been this morose or worse only five times since 1967, and each time the stock market has rallied soon after, with the Standard & Poor’s 500 index producing average returns of 15% six months later and 23% a year after, according to JPMorgan."

Unfortunately, consumer sentiment surveys are coincident, not leading, indicators. And while JP Morgan is correct that Consumer Confidence Index has only been as bad as it is presently 5 times before (the current reading is 57.2), in 3 of those 5 previous occasions, the index got considerably worse (Approximately: 1992 = 48, 1980 = 49, and 1975 = 44).

Even worse, each of those low index readings in the 40s took place AFTER a 12 month or longer recession or bear market had already ended. At this time, it is premature to declare the worst over for either the Consumer Sentiment Index or the economy.

Consider the 2003 low came after the 78% drop in the Nasdaq; the 1980 low came in year 14 year of a 16 year bear market; the 1975 low came after a horrific 1973-74 bear that saw the Dow Industrials get cut in half. Even the 1992 lows came long after the recession and market trouble in 1990.

Have a look at the chart below, via Joseph H. Ellis’ book, Ahead of the Curve. It shows that sentiment bottoms around the same time as the bear market. And, we have yet to get any where near the depths of of many of the 5 prior cycles.


Consumer Sentiment Surveys: Coincident, Not Leading, Indicators  

via Joseph Ellis
(note: this chart does not include 2008 data)


The Conference Board Consumer Confidence Index Declines
May 27, 2008   

When Consumers’ Pain Is Investors’ Joy
Barron’s THE TRADER, JUNE 2, 2008   

Consumer confidence: Worst since ’92
Catherine Clifford
CNNMoney, May 27, 2008: 1:08 PM EDT

Category: Contrary Indicators, Economy, Markets, Psychology

Feldstein Says U.S. Economic Indicators ‘Pointing Down’

Martin Feldstein, an economics professor at Harvard University and president of the National Bureau of Economic Research, talks with about U.S. first-quarter gross domestic product, the outlook for Federal Reserve monetary policy and potential legislation to help homeowners avoid foreclosures.

click for video




Feldstein Says U.S. Economic Indicators `Pointing Down’
Bloomberg, May 29 2008

Category: Economy, Video

Friday Night Jazz: Chet Baker II

I was searching out some of my favorite Jazz artists on YouTube, when I randomly stumbled across this video of Chet Baker. For those of you unfamiliar with Baker, he was a terrific Trumpet player who was later "discovered" as a wistful blues singer, specializing in ballads and love songs.

Chet Baker’s vocal style is unmistakably unique — my favorite
description of his his voice is "at times, it seems like he’s
hanging onto the melody by his fingernails."
He seems at times half a tone off where you might expect him to be.

There is a lovely
melancholy, a gentle beauty, to the way he wraps his voice around a
song. The soft, simple sentiment embodied in his lyrical approach to ballads
can turn any song into a brooding lament.

There’s quite a few other videos at  ChetBaker.net . . .


Either of these two CDs are good places to start exploring Baker’s works:

My Funny Valentine

"His vocals were absolutely distinctive, sung in a high-pitched, even
fragile voice seemingly drained of emotion and yet possessing an
inherent charm, a detachment that might be both the antithesis of style
and its definition, whether it’s heard as sensitivity or indifference.
The singing is a double of his trumpet playing here, spare and barely
present but achieving much through nuance and suggestion. Pianist Russ
Freeman is an almost constant partner, supplying deft chords and
harmonic daring, amplifying Baker’s ideas. Their empathy is especially
evident in the beautiful instrumental "Moon Love," but it’s just as
significant on signature Baker songs such as "My Funny Valentine,"
"Let’s Get Lost," and "Like Someone in Love." 
–Stuart Broomer


The Best of Chet Baker Sings

New videos after the jump

Read More

Category: Friday Night Jazz, Music

Technically, Not a Recession

Category: Economy

Bear vs Bull (1962)

Category: Contrary Indicators, Psychology

Revisiting Q1 GDP Revisions

Category: Data Analysis, Economy

April New Home Sales – Revisited

Category: Data Analysis, Real Estate

NYMEX Raises Margin Requirements for Crude

Category: Commodities, Energy, Trading

KB Homes: U.S. Home Prices Will Drop 10% More

Eli Broad, founder of homebuilder KB Home

click for video




U.S. home prices likely will drop another 10 percent from their peak before the housing market begins to recover, said Eli Broad, founder of Los Angeles-based homebuilder KB Home. "Every housing market’s different, but you can expect housing prices to continue to decline in most markets for the next year or so,” Broad said in an interview from Los Angeles with Bloomberg Television.

Sales of previously owned homes in the U.S. fell 1 percent last month and the supply of unsold properties reached a record, the National Association of Realtors said last week, signaling a continuation of the 27-month housing slump. The median price of an existing home fell to $202,300 from $219,900 in April 2007. "I think we’ve got probably another 10 percent to go” from the price peak reached in 2006, Broad said today.

Broad said the U.S. economy is "in a recession no matter how you want to measure it,” and recommended that investors put their money in the energy industry, multinational companies with the largest stock-market capitalizations, and emerging economies such as Brazil, Russia, India and China. The return on U.S. stocks likely will "be in low single digits” this year, he said.

KB Home Founder Broad Says U.S. Home Prices Will Drop 10% More
Matt Miller and Daniel Taub
Bloomberg, May 28  2008

Category: Real Estate, Video

Dallas Fed: Oil Heading Back Under Par

Category: Commodities, Data Analysis, Energy