On November 30, 1977, Richard Russell of the Dow Theory Letters said the following:
"Bill Bretz, editor of the excellent new Juncture Recognition report (Box 1209. Pompano Beach, FL 33061), has just presented a fascinating sentiment study, the Dow vs. the University of Michigan Consumer Sentiment Index. Normally, says Bill, consumer sentiment and stock prices have a long-term influence on each other. And the chart does show this interesting correlation. But in the recent 214 point decline in the Dow, consumer sentiment has stayed bullish. Says Bretz, “The market has never fallen so far in an atmosphere of such total unconcern...I can't help but wonder how far down the Dow will have to go in order to produce the kind of fright that is the hallmark of an important market bottom.” (Russell, Richard. Dow Theory Letters. November 30, 1977. page 5.)."
As we highlighted in our article titled Dow’s Theory on Consumer Sentiment dated April 1, 2019:
“…when we change the data for each indicator to reflect the percentage change from the prior year, we get a useful representation of the data that is relative to each indicator that can also be compared to one another.”
Let’s look at the same indicators on a monthly basis and see if the year-over-year percentage change provides a better perspective on the topic.
When viewed on a year-over-year percentage change basis, the period in question, from the 1976 peak to November 1977, the two indicators had the most correlation of a peak and decline up to that point since 1964.
When presented in this fashion (y-o-y % change) we arrive at an answer to the question stated above by Bretz:
“…how far down the Dow will have to go in order to produce the kind of fright that is the hallmark of an important market bottom.”
In fact, the Dow Jones Industrial Average (DJIA) and the University of Michigan Consumer Sentiment Survey (UMCSENT) did not need much in the way of declining to match each other as both indicators were well on their way to bottoming out, with the DJIA reversing to the upside well before the UMCSENT.