Investor confidence flashes two favorable signals

Key points:

• Consumer confidence toward stocks is rebounding, flashing a buy signal
• The rebound comes as a 10-month average of their attitude toward fell to a historically low level
• The S&P 500 and Nasdaq 100 have shown gains in the months following similar behavior

The average consumer is a little less bearish on stocks 

Consumers are finally starting to warm up to the stock market.

According to a monthly survey from the Conference Board, the net percentage of consumers expecting stocks to increase versus decrease rebounded from the worst level in a decade. When this reverses from a low level, it suggests that bearish sentiment is reversing and better days may be ahead for stocks.

The chart below displays those times when this spread crossed above -13.3%, and the table shows S&P 500 performance following those signals. While past performance doesn't guarantee future results, the S&P showed a positive return every time across every time frame. The latest signal was triggered at the end of August.

The results were even more robust when we look at the Nasdaq 100 (NDX) instead of the S&P 500. Performance for the NDX following this signal appears in the chart and table below. Again, positive returns across every time frame, with an impressive average.

A long-term average of bulls has dropped to an extreme

While the net percentage of bulls minus bears finally turned higher last month, a long-term average of the percentage of bulls has drifted to a historically low level. 

The chart below shows when the 10-month moving average for this indicator crossed below 31, and the table displays S&P 500 performance following those signals. While it occurred relatively early in the 2001 and 2008 bear markets, shorter-term returns were mostly positive.

Once again, the results were even more robust when we look at the Nasdaq 100 instead of the S&P 500. Performance for the NDX following this signal appears in the chart and table below.

What the research tells us…

The signals above have a strong history of foreshadowing favorable stock market action. In the face of a persistent market decline, it is easy to dismiss them. The best way to use these indicators is as part of a weight-of-the-evidence approach rather than as a standalone model. Given the recent signals detailed above, investors should be watching closely for any bullish confirmation - ideally involving price reversing higher without taking out the June 2022 lows.