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When it comes to confidence, this is as good as it gets, for now...

For the past two weeks we have seen consumer confidence come in much better than the Depressionistas expected.  Last week the University of Michigan was better than expected and today's conference board index number reflects two months of significant improvement; the index is now at its highest level in eight months (Sept - 08, 61.4).

Markets are built on confidence - this round trip in US consumer confidence (see chart below) has equated to a generational short squeeze in the US stock market. But where does the market go from here, now that all of this is in the rear view?

While consumers are considerably less pessimistic than they were earlier this year, and the trends in the labor market are less bad, we have likely seen the bulk of the gains in consumer confidence. 

It appears that we are more likely to see the numbers begin to PEAK sequentially. This is a very important call for Research Edge to be considering, given that we were one of the few macro strategy firms who proactively predicted that things were going to TROUGH sequentially, back in February when they did.

The market reaction to today's numbers is obvious-early cycle stocks are rocking ahead.  We believe that we are headed to sequential peaks in our US Consumer MEGA Squeeze call from earlier this year.  The acronym MEGA - (M)oney (E)mployment (G)as and (A)ssets - is our metaphor for how we view the prospects for the consumer.  The trends in these MACRO factors help to influence consumer confidence, which appears to be peaking sequentially AFTER the factors have led them to.

This thesis is also being played out in the Case-Shiller home-price index where there was a slight month-to-month acceleration in the decline of home prices. Unfortunately, that data point is somewhat stale (it's a March number).

Everything that matters in our macro model happens on the margin. Sentiment peaks can occur at lower price peaks. Inclusive of today's US market strength, what you're observing here today is simply another lower high.

Howard Penney

Managing Director

Keith McCullough

CEO

Peaking Sequentially? - conf1

Peaking Sequentially? - conf2