Before we get started, I just wanna say that the method used here is an extension of an article written in 2015 on Stockcharts called "This Signal Is Bullish And Rarely Fails". Worth a read to better, it's a short article with more depth, but the forecast is outdated.
In short: Consumer sentiment always leads the Stock market.
Okay, so what's going on here? Someone once asked me about consumer spending "growing" that keeps getting reported in the news every day in relation with the GDP...
Well, the GDP "numbers" are always a lagging indicator to an economic down turn. As for the consumer spending, that is where this chart comes to play. The idea is that we're charting the orange line with XLY (Consumer Discretionary - Things you WANT (like an x-box)) / XLP(Consumer Staple - Things you NEED (like soap)). So if the slope of the line is positive (all the green lines) then people are spending on things they WANT and not just NEED, hence signaling a positive sentiment in the economy and therefore we should expect a stronger market. Well if that's the case, then the opposite is also true. Meaning, if we have a negative slope (black lines on the XLY/XLP chart) this is signaling that there is a weakness in the economy and therefore we should expect a weaker market. However, this sentiment doesn't always go hand-in-hand with the market and ends up creating DIVERGENCES (shown in the chart) all of which have been leading indicators to past recessions and nowadays we have another NEG DIVERGENCE looming around. And as you can see, the consumer sentiment always turns before the market bottoms or peaks.
Also, some people have argued that we've been in a recession that started late last year around the time SPY broke below the trend line from the 2009 lows.
Remember that this is only one of the many red flags out there (Feds cutting rate, QE4 (or whatever you wanna call), BREXIT, The Deal, Hong-Kong (it's still happening)) that have kept me bearish on the market for while and that this analysis in not trying to 'time' the market, only predict the direction. As always...
***Let's talk about it...***
In short: Consumer sentiment always leads the Stock market.
Okay, so what's going on here? Someone once asked me about consumer spending "growing" that keeps getting reported in the news every day in relation with the GDP...
Well, the GDP "numbers" are always a lagging indicator to an economic down turn. As for the consumer spending, that is where this chart comes to play. The idea is that we're charting the orange line with XLY (Consumer Discretionary - Things you WANT (like an x-box)) / XLP(Consumer Staple - Things you NEED (like soap)). So if the slope of the line is positive (all the green lines) then people are spending on things they WANT and not just NEED, hence signaling a positive sentiment in the economy and therefore we should expect a stronger market. Well if that's the case, then the opposite is also true. Meaning, if we have a negative slope (black lines on the XLY/XLP chart) this is signaling that there is a weakness in the economy and therefore we should expect a weaker market. However, this sentiment doesn't always go hand-in-hand with the market and ends up creating DIVERGENCES (shown in the chart) all of which have been leading indicators to past recessions and nowadays we have another NEG DIVERGENCE looming around. And as you can see, the consumer sentiment always turns before the market bottoms or peaks.
Also, some people have argued that we've been in a recession that started late last year around the time SPY broke below the trend line from the 2009 lows.
Remember that this is only one of the many red flags out there (Feds cutting rate, QE4 (or whatever you wanna call), BREXIT, The Deal, Hong-Kong (it's still happening)) that have kept me bearish on the market for while and that this analysis in not trying to 'time' the market, only predict the direction. As always...
***Let's talk about it...***
