Saturday, September 12, 2009

Consumer Confidence Index

Warren Buffett said:"Be fearful when others are greedy; and to be greedy only when others are fearful." We know the idiom very well but how many of us know how to apply this classic idiom in the stock market?

There are many indicators that track the market sentiment such as the GDP, unemployment rate, volatility index, put-call ratio and so on. Today I want to talk about one particular indicator which I think is a good representation of the sentiment of the economy as well as the stock markets - The Consumer Confidence Index (CCI).
Consumer Confidence Index is an American indicator but it definitely affects the rest of the world. From the CCI we can tell whether the public sentiment is bullish or bearish. This is important because we want to know when the majority people are greedy and when they are fearful. Here's a look at the current CCI, as at August 2009 the CCI stood at 54.1, while the base year was 1985 with 100 index. The dip we saw in the chart above was registered in February this year at 25.3, which is its 42-year low in the American history.

In order to know how low or high is this figure, let's take a look at another chart, the past trend. We can see from the chart below that the average was 102.9 which almost double the current August'09 CCI.

The virtue of the Consumer Confidence Index is that it gives you a big picture of the economy. And if you see that the index dip to the historical low level like the one in February, you should be smiling instead of feeling fearful.
Hence, if you were to ask me whether I'm buying into the stock market, my answer is 'Yes"!

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