Trading the news CBI: Consumer Confidence Index®:


Former Special Consultant to the FPA
The Conference Board Inc asks about 5000 households in the USA to rate the relative level of their confidence in the economy, judging both the present situation as well as the future expectations. The questions pertain to different outlooks such as labour availability, business conditions and the overall economic situation. Their responses are Indexed with the base year being 1985. This means that if a reading comes up more than 100 the respondents felt that the shape of the economy as well as their future expectations were better than those surveyed in 1985.
The Consumer Confidence Index®, is released generally on the last week of every month for the month it was measured in, i.e. the Index released in March 2012 is the survey for march 2012, unlike a lot of indicators there is not much of a lag from data collection to the Index release time.

The Conference Board Consumer Confidence Index®, which had increased in February by about 16% (Compared to that of January) to 70.8, pulled back by 0.7% in March to 70.2. The Index now stands at 70.2.
However the story is interesting, The Present Situation Index, increased by about 11% % (MoM) to 51.0 , however the Expectations Index declined about 7% (MoM) to 83.0.
Comparing the march Consumer Confidence Index to that of the same period last year we see a Increase of about 10%.

Now enough of the accurate but useless data, lets try and understand what the index is telling us about the current and future expectations of the USA’s economy and why traders care. In lay mans terms : Financial confidence is a leading indicator of consumer spending, which accounts for a majority of overall economic activity; Looking at the index we find that the outlook of USA’s economy is that it is still in bad shape, it is improving but the people do not expect it to continue to improve.

This basically means that people should continue to hold their purses tight and may save rather than spend. So for industries that rely on consumers to spend lavishly would struggle (e.g. Travel and tourism) for and the industries that make a buck out of consumers being diligent with their money will prosper (Budget/used cars) since we are not at any market extremes one count attempt to trade with this sentiment, i.e. if you are a stock trader continue to search for companies in the budget sector with a positive alpha.

Trading Currencies using the CCI:
Trading currencies is a little more difficult than trading stocks, when I say difficult all I meen is that its multi-dimensional, since we would be trading one currency against the USD in this case one needs to comprehend the dynamics involved with the other Paired up currency. Since the EurUSD is the Most liquid pair I tend to use it to trade most USA news releases.
l personally do not use the Consumer Confidence Index at its face value, I am of the opinion that consumers are the last people to know when the economy is really prospering, or if they are in a false bubble (dot com bubble/ house bubble both preceded with a very High CCI) My father once said, its never as bad as it seems and never as good as it looks. I use the CCI to give me clues as to when the sentiment may be at extremes, and place contrarian trades.

The Strategy I have adopted over the last 5 years have yielded some amazing results, with 6 trades over the last 3 years averaging 350 pips of profit at a risk of about 150 pips each time. I call this the valley and the peak strategy.

However Since the FPA does not allow the strtergy to be posted in the Market Predictions and Reports, you may read the article at: Trading the news CBI: Consumer Confidence Index®: | Professional Forex News Trading Services