University of Michigan Sentiment Index Gives a Stock Market Crash Warning

By: Robert McHugh | Sun, Sep 18, 2005
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We've been presenting this chart for three years now, and have been pointing out that the University of Michigan Consumer Sentiment Index gave an early warning of a stock market crash back in early 2000. It gave a very early warning by tracing out a Head & Shoulders top in 1999 and 2000, then actually gave a stock market crash signal when it plunged below the neckline of the H&S pattern. Sure enough, the Dow Industrials plunged shortly thereafter, an initial 2,000 point collapse.

Since then, correlation has continued to be truly remarkable between this consumer sentiment gauge and the price movements of the Dow Industrials. Often the sentiment index and equity prices move contemporaneously, so we do not benefit from foresight. However, on occasion, we do get an early warning as the sentiment index leads prices. About a year ago, we identified another very early warning by the U. of Michigan sentiment gauge, a Head & Shoulders Top. It unfolded over a three year period, but as the right shoulder completed, we were able to measure the potential decline coming in the Dow Industrials. The initial decline would be in the 1,800 to 2,000 point range. All we awaited was a decisive break below the neckline.

That occurred Friday September 16th, when the University of Michigan released its September confidence measure - a plunge in confidence from 87.1 (the neckline) to 76.9, a 12.2 dive. This, my dear friends is a Stock Market Crash warning. It is the worst single month plunge in the index since before 1997. The third worst one-month decline occurred in December 2000, down 9.2. The Dow started crashing the very next month, in January 2001, and kept going lower for almost two more years. The second worst occurred in September 2001, but was contemporaneous with the 9/11 equity market decline. There are no guarantees, of course, but stand up and take notice: Today's MCSI plunge was worse than 9/11's.

Validating the MCSI signal is an analog of the Japanese Tokyo Nikkei Index from 1984 through 1997 versus the Dow Industrials from 1995, also warning that right now, during the next month, a crash occurred in the Nikkei and is thus due in the Dow Industrials. Right now. Amazing. Analogues eventually break apart, but so far this one hasn't. Hope the Plunge Protection Team have their buy orders lined up.

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"Beloved, do not be surprised at the fiery ordeal among you,
which comes upon you for your testing, as though
some strange thing were happening to you;
But to the degree that you share the sufferings of Christ,
keep on rejoicing; so that also at the revelation of His glory,
you may rejoice with exultation.
If you are reviled for the name of Christ, you are blessed,
because the Spirit of glory and of God rests upon you."

1 Peter 4: 12 - 14


Robert McHugh

Author: Robert McHugh

Robert D. McHugh, Jr. Ph.D.
Main Line Investors, Inc.

Robert McHugh

Robert McHugh Ph.D. is President and CEO of Main Line Investors, Inc., a registered investment advisor in the Commonwealth of Pennsylvania, and can be reached at The statements, opinions and analyses presented in this newsletter are provided as a general information and education service only. Opinions, estimates and probabilities expressed herein constitute the judgment of the author as of the date indicated and are subject to change without notice. Nothing contained in this newsletter is intended to be, nor shall it be construed as, investment advice, nor is it to be relied upon in making any investment or other decision. Prior to making any investment decision, you are advised to consult with your broker, investment advisor or other appropriate tax or financial professional to determine the suitability of any investment. Neither Main Line Investors, Inc. nor Robert D. McHugh, Jr., Ph.D. Editor shall be responsible or have any liability for investment decisions based upon, or the results obtained from, the information provided.

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