Take Profits in October as Confidence, Sentiment Waver

Time to Take Profits

A pair of reports this week indicated that confidence has wavered in both the consumer and investor segments. For this reason and more, we think now is a good time to take some capital off the table and reduce risk in portfolios away from equities for the near-term.

Consumer Confidence and Investor Sentiment Waver

Two key metrics measuring consumer confidence and investor sentiment both offered the same sobering news on Tuesday, as confidence has wavered from the careless spendthrift days of late (those being in August). While consumers have been spending slightly more than dead people, investors have been enjoying a folly-filled ride from the panic-level pit of March 9. The S&P 500 Index was recently up over 50% from that day's pitiful low, but that was just the right amount of profit to raise the question in the collective mind of investors: "How much higher can this market go?"

Investor Sentiment, as measured by State Street, fell globally to 118.1 in September, from 221.9 in August. That still marks an expansion of risk taking. Also, considering the metric is up from a 52-week low of 82.1, and that it fell from its five-year high, the news does not sound so terrible. Still, just as Rome was not built in a day, it was neither dismantled in one. And we remind you, inflection points matter. Change in direction is a critical market-moving factor, and this decrease in sentiment marks the first decline after eight consecutive increases. U.S. readers take note: the North American segment of this measure dropped 4.6 points, to 113.7.

What we find most unnerving about this data is that it coincides with other red flags. Last week's Housing Sales slippage, for instance, offered solid reason for doubt in a sound real estate recovery. Federal economic caretakers have also reminded us of late that the end of recession does not necessarily mean the beginning of recovery is on tap. Nor does it signify that recovery will be as equally robust as contraction was terrifying. Meanwhile, stocks have already tallied big profits ahead of year-end closures. State Street's measure takes account of institutional investor sentiment, and many professionally run funds close their books in the fall. Thus, it's a fine time for performance minded portfolio managers to lock in those relative gains.

History also tells us that a string of monthly gains this long wears thin soon enough. September marked the seventh straight monthly rise for the S&P 500 Index, marking only the 16th time in history since 1928 that this has occurred. Needless to say, the odds of October following suit are slim to none. Also, as some funds close their books for the quarter, they have likely added market winners to their Statement of Holdings (we call this window dressing). After September's end comes to pass, though, all bets are off.

Consumer Confidence Still Lacking

Despite the Reuters/University of Michigan data posted last week showing a gain, consumer confidence is still lacking. The Conference Board reported Consumer Confidence fell in September to 53.1, down from 54.5 (54.1 initially reported) in August. The fading figure also fell short of economists' view for a reading of 57.0, based on Bloomberg's survey.

The Present Situation Index, the portion of the composite measure that represents the general view of the current situation, showed surveyed households are not holding up well. This index dropped to 22.7 from 25.4 in August. Much of current situation concern in September arose due to a poor job market impression. 47% of those surveyed now view jobs "hard to get," compared against the 44.3% that thought so last month. The Expectations Index shows that folks do not generally expect the labor market to improve much over the next six months. That has a way of weighing on spending, my friends.

Conclusion

Between the change in investor sentiment and the unemployment-burdened consumer segment, we think the winded market is going to find setbacks in October. Thus, now seems like a good time to reconsider portfolio allocations, and move some capital into less risky assets and out of equities temporarily.

Disclosure: No positions

Comments

[Tony Petroski:]

Now you tell me. I needed this advice a few days ago.

Oct 02 06:54 PM

[Markos Kaminis:]

This is still fresh advice brother. Today only marked October 2nd, and I wrote it with more than a day in mind. We've correctly called bottoms for oil and the market, and have made countless other timely and correct calls over the years. So, stay attuned. God bless.

Greek

Oct 03 02:08 AM

[Albertarocks:]

On Oct 02 06:54 PM Tony Petroski wrote:

> Now you tell me. I needed this advice a few days ago.

Would you have listened to it a few days ago? Many wouldn't have.

Oct 04 11:26 AM