As always, we love to read and respond to your e-mails… even the ones that are in disagreement (and even the ones that aren’t always nice). Tuesday’s edition “Down 4%, Almost Just What The Doctor Ordered” sparked a lot of responses from our reader base, and a few of those questions and comments are worth answering publicly. So, here they are.

One reader wrote in…

You guys are jokers; why could not you say so on Friday. You watch and describe what you see and then turn around afterwords and say you already knew it. You can’t play confidence tricks. First predict and then say, I said so. It is my advice to you.

SCN Response: Hi. You’re always welcome to comment and criticize (and disagree). However, please do so consistently and fairly.

Contrary to what you said/implied, we were VERY specific with our words, citing the expectation of a pullback all the way to the 790/800 zone. (in response to a comment the reader made in a different e-mail “It is a mumbo-jumbo statement that is imprecise and worthless.”) How much more precise can we be? We’ve told you twice now to look for a pullback to the 800/790 zone.

In response to your other comment “why could not you say so on Friday?”, it’s because we didn’t publish on Friday. However, we DID call for a substantial pullback back on the 6th….
(http://www.smallcapnetwork.com/Stock-Market-Update-Lower-Before-Higher-But-A-Survivable-Dip/af/archive/20090406-1/)

As much as we’d like to publish in real-time, every day, and hold your hand every step of the way, that’s not what we do. That’s not even what we want to do. It sort of seems like you want someone else to take 100% responsibility for your success. Sorry - that’s still on your shoulders. We’re only trying to provide perspective you won’t get from the talking heads on TV.

Another reader wrote…

Thank you for your notes to-day.
 
Can you tell me an easy way to track the VIX, ISE Call Option and Conference Board Consumer Confidence?
 
Also, where may I read more on how to interpret these measurements?
 
thank you.

SCN Response: Unfortunately, the only place I know that looks at this data consistently (and interprets it) is….. smallcapnetwork.com.

The VIX is a cboe.com creation, and the ISE sentiment index (put/call ratio) is an ISE Exchange creation. Those websites probably offer a chart of each.

The consumer confidence chart  (long-term, anyway) is only created by us that I’m aware of. Short-term charts (too short to be of any real use) may be available at briefing.com.

We also got this comment…

Its clear from your own chart, Consumer confidence is highly correlated to S&P500. hence when they are both high they will, naturally go back down at some time in the future. The problem is timing, and I don’t see how consumer confidence is an indicator of WHEN you are at a peak vs. still climbing.

SCN Response: Great point.

We didn’t bring this up in the text, just because it’s a lengthy discussion that most people wouldn’t read (and it can complicate matters). Here’s the answer to your concern though…

There are two basic ways to not fall into the the trap you described.

1. Consumer confidence tends to ‘turn’ before the market does. So, we look for the point where consumers feel and think differently even if the market’s action is still suggesting something else. Confidence ‘leads’ by about 1 to 3 months, though you can’t quite tell it from the highly-compacted chart.

2. We use Bollinger bands to spot the extremes, meaning we look for the points where confidence has reached too far, too fast (both good and bad). A reading of 120 is tolerable if the reading has progressed from 116, to 117, to118, to 119, and to 120. However, if a confidence reading moves from 80 straight to 120, it’s probably going to intercept an upper Bollinger band, and thus tell us confidence has peaked (which is bearish). Obviously we didn’t apply Bollinger bands yesterday, just to avoid raising more questions than we answered.

It’s still not an absolutely perfect indicator, but it’s a powerful one when used as described above - more powerful than many other tools used to time the market. We’ve managed to successfully ’systemize’ it, meaning back-tested, hypothetical trading using the data as we described above has yielded results that easily beat a buy-and-hold approach.

Hope that helps.

** That’s it for now, but like I said, we’re open to any reasonable question or response.

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