Consumers:  Thanksgiving Looking Much Better Than Memorial Day

Posted At 8:45 AM EST

Good morning...We begin the day with flat pre-market futures after yesterday's moonshot that took a lot of people by surprise.

It's always dicey to assign cause and effect to day-to-day movements in stocks, but the more short-term we go, the more clear it often becomes.  If the S&P 500 suddenly spikes 10 points in the seconds after GE releases its earnings report, then it's a pretty safe assumption that the S&P spiked because of GE's earnings.  If the S&P rallied 10% in the months after that, though, then it would be much more difficult to argue that the 10% rally was cause solely by GE.

Yesterday's move was one of the more unusual I've seen.  It's a pretty safe assumption that the big spike in the market at 10:00am was due to the much better-than-expected Consumer Confidence report, but this report isn't usually a market-mover, and it's not a big enough driver to carry us into a trend day like we saw.  Certainly other forces were at work both before and after the release, but it was something of an upside trigger for the day.

The report was expected to show an increase in confidence, but it jumped by one of the largest amounts in the survey's history.  Of course, it's coming off the lowest level in history and even after the recovery over the past couple of months, is still showing an historical level of pessimism.

The report is broken out into different pieces, the most interesting of which is Expectations and the Present Situation.  Basically, the former asks how positive respondents think things will be six months from now in relation to business conditions, employment and family income.  The latter asks how they feel about current conditions.

The overall Consumer Confidence number combines all of these answers to come up with the index in the chart above.  But when we separate Expectations from the Present Situation, we find that the vast bulk of the jump in Confidence was due to a huge renewal in optimism about the future, and not about how things are right now.

The chart below shows the difference between Expectations and the Present Situation, and it makes it abundantly clear that Confidence is rising because people think they're going to be better off by November than they are now.

This might seem unjustified and probably a good contrary indicator, but surprisingly enough it hasn't been.  The green arrows on the chart show other times that the difference between Expectations and the Present Situation went from below 0 to greater than +25.

It's somewhat difficult to see on the chart, but those were actually pretty good buy points for stocks over the intermediate- to long-term.  The table below shows each of the occurrences along with the S&P's performance going forward.

By three months later, the S&P was higher each time by at least +3%, and all but one by +6% or more.  By six months later, all but once the S&P was up by double-digits (and that one exception just barely missed).

Normally I'd be looking to trade against situations where consumers, investors or traders are so much more optimistic about how things might be than how they are now, but based on the history of this particular series, I see no evidence that that would be a good idea.

Bottom line - Intermediate-term Outlook:  Neutral  (since April 9)

Beginning in early March, we discussed a large number of reasons to expect an imminent rally of one to three months' duration.  Some of those studies were even more positive, and suggested not just a rally, but possibly a new bull market.

During mid-April, several of our measures like the Indicator Score and Dumb Money Confidence reached levels that usually result in either a flattening out of the price rally, or an outright decline...especially during a bear market.

But the market held up extremely well in spite of some of these overbought types of indications.  This is very rare during an ongoing bear market, and is important to keep in mind especially given many of the "this time is different" kinds of studies we reiterated in early May.

The S&P 500 broke out over 875 a few weeks ago, and has since re-tested that breakout level twice, holding firmly both times.  This makes it exceptionally hard to find anything "wrong" with the rally so far.  Some preliminary uptrend lines were broken earlier this month, showing a slow-down in the trend, and there is a possibility of forming a double top if we break below 875ish (which would project down to about 830).  But unless that happens, trying to bet against this rally is a tough row to hoe.

Bottom line - Short-term Outlook:   Neutral  (since April 20)

Since the middle of last week, I was looking for an idealized short-term scenario that was pretty close to coming to fruition given the weakness we were seeing early on Tuesday.  But the recovery right from the open of regular trading hours, and subsequent reaction to the Consumer Confidence report, rendered that moot.

The best situation for a long trade would have been the traditional weakness following an exchange holiday, then a seasonally-supported rally into the new month.  Instead we got one of the most positive reactions on the day following a holiday in history.

In the past when the S&P has been able to rally strongly following a holiday, we got some short-term weakness immediately following, but it was rarely severe.  Out of 14 instances of +2% rallies, the next day was up only 35% of the time, but only two of those showed losses greater than -1%.

Our shortest-term guides are very stretched here as well, and indicators like the Equity-only Put/Call Ratio are showing too much interest in yesterday's move.  Every time since the March low that the put/call ratio has recorded an extreme like yesterday, stocks have chopped around at best over the next 1-5 sessions.

Seasonality is quite strong over the next few days, so that's a factor pushing against any short-side bets here, but even so it seems unlikely that a move back towards the recent highs over the next day or two will lead to a sustained breakout to new recovery highs and I'm looking for at least a very short-term pullback after yesterday's surge.

All the best,