Keep an Eye on Consumer Confidence This Week

The Conference Board is set to release the Consumer Confidence Index for October on Tuesday. The index has been surging higher in recent months and the September reading was 138.4. That is the highest reading since September 2000.

The Consumer Confidence Index can potentially be used as a contrarian indicator for the overall market. Historically, the highest readings have come at market tops and the lowest readings have come at market bottoms.

High readings themselves haven’t necessarily been a signal of an impending bear market, however. From 1997-2000, the index was above the 125 level and the market continued to move higher. However, when the index fell by more than 10% from its peak is when things started getting bad.

With the recent peak reading of 138.4, the index would need to drop down to 124.6 in order to represent a 10% decline. The index may not drop that far in one month, but with the tremendous selloff we have seen in stocks recently, it could happen.

Obviously, you can’t trade the Consumer Confidence Index directly, but investors may want to consider taking defensive actions to protect their portfolios, in my view. One way to do that would be to buy long-term put options on an index ETF like the SPDR S&P 500 ETF (NYSE: SPY), or an investor could buy an inverse index ETF like the ProShares Short S&P 500 ETF (NYSE: SH). To note, these are not my recommendations and these tickers should not constitute investment advice. 

Either of these actions could potentially help hedge a portfolio against an overall market correction. The amount allocated to a hedge should be determined by the construction of the portfolio. The greater the allocation to equities, the bigger the hedge will need to be in order to be effective.

Investors should also consider the makeup of their equity portfolio in order to choose the index to hedge. If the portfolio is heavily weighted with tech and healthcare stocks, the Invesco QQQ Trust (Nasdaq: QQQ) would potentially be a better ETF to buy puts on versus the Spyders. Or the ProShares Short QQQ (NYSE: PSQ) could potentially be a better inverse ETF to buy, in my view. 

The market has been shaky for the past month and hopefully investors have been able to navigate the volatility in their portfolio, or to remain patient if you're long-term oriented. The Consumer Confidence Index is just one indicator that can be used to judge the sentiment toward the market and can help investors chart a course of actions to take.