Short-term Outlook:  Neutral  From Feb 26, 1107 SPX

Equity Indicators - Updates and Extremes

Conference Board Consumer Confidence

One of the more popular topics last week was Consumer Confidence, and namely the sharp drop in this month's reading.

Over the past six months or so, the Conference Board and University of Michigan's reports on consumers have had more outsized market impacts than they typically have had in the past, as traders fret about an economic recovery taking hold.

The topic of the drop in Confidence has been well-worn already over the past several days, but I did want to highlight one interesting study that I haven't seen mentioned elsewhere.

Not only was the 15%+ drop in Consumer Confidence large, it came during a time when Confidence was already depressed.  The chart below shows the history of Consumer Confidence, along with dotted lines that show any time the survey dropped 15% or more while Confidence was already under 100.

The following table shows the returns in the S&P 500 going forward after those instances:

Several of the dates were bunched together, which distorts the average return somewhat.  Still, they were impressive.  A few times, we saw stocks tank in the short- to intermediate-term, but in every case the S&P was positive on a long-term basis.

By six months later, the average return swamped "any random time" returns.  After a year, only two of the occurrences did not show double-digit gains in stocks.

There were really only two times when this occurred after the stock market had already rallied heartily.  Those were in April and May 1980 (though stocks had corrected more than 10% right before the drop in confidence), and again in 1991 and 1992.  Both times, stocks held well going forward.

Small Trader Options Trading

Trading among the smallest of options traders has been a focus here ever since December and January when we were seeing absolutely no desire for downside protection from these traders (a very bad sign for the market), and to a lesser extent, too much speculative interest in call options.

There still has been no big surge in interest for protection; buying protective put options was still the least-favorite activity among small options traders last week, garnering 17% of total volume (behind selling calls at 34% of volume, buying calls at 29% and selling puts at 21%).

There was one small glimmer for bulls, anyway.  Speculative call buying activity has dropped off precipitously, declining from nearly 40% of total volume in mid-January to less than 30% last week.

When looking over the past five years, this is a very low level of speculation - in the bottom 5% of all weekly readings.

So as the indices attempt to recover over half their January losses, we can at least say that these small traders aren't jumping on the bandwagon trying to ride it higher, which is a help.  But protective put buying remains very low, and overall I would not consider this data to be giving a "buy" signal.  With the drop in call buying, however, at least it's still not flashing "sell".