Michigan Consumer Confidence Impact in Equities

Published by Filipe R. Costa on Mon, 18/04/2011 - 12:00

Last Friday was released the University of Michigan Consumer Sentiment Index for April. The index rose to 69.6 from 67.5 in March, and more importantly it came out better than the 66.5 expected. Although 69.6 is still far from this year registered high of 77.5 in February, investors considered the value as being very positive.

The recent rise in oil prices is expected to have a negative impact in consumer sentiment and thus can influence consumer habits undermining GDP growth. But, the American consumer is optimistic about future economic prospects because of the recent improvements in labour market conditions. TThe final impact was positive and the Mich Sentiment rose unexpectedly.

If you trade the news and are looking for day trade opportunities, you probably look at this kind of reports to assume positions for short periods. Financial spread betting is an excellent way to speculate on this kind of events.

The Mich Sentiment Index was released last Friday at 2.55 pm GMT. At that time the Dow was trading at 12,274. The report had an immediate effect in the Dow and allowed for some trading. Let's look at market change in the following table:

Dow 30 Time
12,274 before release
12,290 1 minute after release
12,300 5 minutes after
12,326 10 minutes later
12,322 20 minutes later

The Dow increased 16 points in the minute after the report release, and it still managed to increase 32 points in the subsequent 19 minutes. It means that you had time to prepare a strategy and avoid going blind into this trade.

You should be prepared for both a negative and a positive surprise, wait for the report itself and in one minute assume a position in the market. Entering the market before the release would allow you to capture the first minute points increase, but unless you possess some good information about the release (better than the mean of economists), you would be gambling on a value.

A sound strategy here would have been to wait a few seconds after the report release to check if it was a good surprise or not. Since in fact it was, you could have bought at around 12,290 (maybe a few less if you take less than one minute) and then hold and see. After 10 minutes the index was still on the rise, so you could have kept your position opened. After 20 minutes there was a slight retreat and the major upside may have been over. The Dow closed higher than that in the day, but for the purposes of speculating on the report result, 20 minutes was sufficient. You don't want to keep a position opened since it would be impacted by other events. Sell at 12,322 and take profits is the way to go. Thirty two points in thirty minutes. Not bad!