Watch For A Peak In Consumer Sentiment

Utilizing sentiment measures in one's analysis is not an exact science. On the other hand, at their extremes, these sentiment measures do provide signals of a potential near-term change in market and economic direction. A number of 'investor sentiment' measures are available to evaluate, but I am highlighting only two below, the NAAIM Exposure Index and the American Association of Individual Investors (AAII) Sentiment Survey.

As the below chart shows, the NAAIM Exposure Index reading of 98.3% is approaching overly bullish sentiment on the part of institutional active managers. Reflecting the individual investor sentiment is the green line on the chart showing AAII's percent bullish reading and it is trending higher at 43.5%, but not at an extreme. High readings for this measure are generally at levels near 50% bullish or higher.

As it relates to economic sentiment, the below chart displays the Conference Board's Consumer Confidence Index that was released on Tuesday. The reading of 133.4 exceeded the high end of consensus expectations of 128.0. Two important highlights in the report are related to consumer income and employment prospects and according to Econoday,

  • "The most important detail in the August report is a notable decline in those saying jobs are currently hard to get which is down very steeply from an already thin 14.8% to 12.7%. This is extremely favorable for this reading and is certain to raise expectations for a very healthy monthly employment report for August.
  • "A second detail that speaks to impressive strength is the outlook on income. Optimists here rose a very sharp 5.1 percentage points to 25.5 percent with pessimists shrinking 2.4 points to 7.0 percent. The gain here not only reflects the strength of the labor market but also the strength of the stock market."

Today's (Friday) University of Michigan Consumer Sentiment was reported at 96.2. This too exceeded the top end of the consensus range; however, it remains below the July reading of 97.9, but above the mid-month reading of 95.5. Highlighted in the report are a couple of important takeaways:

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