Carr: Strong Durable Goods is Bullish Sign for Stocks

Wednesday, 24 Aug 2011 08:57 AM

By Michael Carr

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Orders for durable goods were up 4.0 percent in July according to the Census Bureau. More important than the reported monthly change in durable goods is the change compared to last year. Orders increased 9.2 percent since last July. This most recent report is a bullish sign for the stock market.

Durable goods are things like washing machines, computer printers, or anything that is expected to last at least three years. The trend in orders for these products is a direct reflection of consumer confidence.

By making large purchases, individuals are indicating that they are generally optimistic about their economic future.

manufacturegetty200-(1).jpg
(Getty Images photo)
When consumers are confident that they’ll have the income to make monthly payments, they buy durable goods.

Business confidence is also reflected in the new orders number.

This indicator does a surprisingly good job predicting stock market performance.

Buying stocks only when new orders are higher than they were a year ago delivers results about twice as good as a simple buy-and-hold strategy. It is especially useful as a sell signal, helping avoid nearly every 20 percent decline in stocks since the durable goods data has been available.

No market timing strategy is perfect, but the annualized change in the durable goods number has been pretty good in the past. It’s likely to continue providing useful signals in the future.

For now, the indicator is bullish.

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