“Davidson” on Chicago Fed vs Industrial Manufacturing

“Davidson” Submits:

Good example of how 2 indices using different criteria provide different results. The Chicago Fed is a soft data sentiment index while the Ind Prod Mfg is hard data driven, i.e. actual $value of goods produced.

You can see that CFMMI was soft late 2003 into late 2005 and then mid-2006 till early 2007 while the Ind Prod kept rising without a similar pattern.

CFMMI turned with the Ind Prod at tops and bottoms, but was only helpful at calling a SP500 turn in early 2009.

Capture447 624x295 Davidson on Chicago Fed vs Industrial Manufacturing

My two cents:

Sentiment indicators can be very dangerous. Had you seen the Fed Sentiment weakening in 2003 and then flatline in 2005-07 and simply “sat out” the market, you would have made a VERY unwise investing decision. Why? The market almost doubled in that time frame:

Capture448 624x168 Davidson on Chicago Fed vs Industrial Manufacturing

Even at “top and bottoms” of the market, the sentiment indicator is meaningless unless a correspnding turn in the actual data is present.

People’s “sentiment” will rule markets on a day to day basis but it is the actual data that overtime rules the direction.

About the Author

Todd Sullivan is a Massachusetts-based value investor and a General Partner in Rand Strategic Partners. He looks for investments he believes are selling for a discount to their intrinsic value given their current situation and future prospects. He holds them until that value is realized or the fundamentals change in a way that no longer support his thesis. His blog features his various ideas and commentary and he updates readers on their progress in a timely fashion. His commentary has been seen in the online versions of the Wall St. Journal, New York Times, CNN Money, Business Week, Crain’s NY, Kiplingers and other publications. He has also appeared on Fox Business News & Fox News and is a RealMoney.com contributor. His commentary on Starbucks during 2008 was recently quoted by its Founder Howard Schultz in his recent book “Onward”. In 2011 he was asked to present an investment idea at Bill Ackman’s “Harbor Investment Conference”.