As often stated in my weekly “Words from the Wise” reviews, a confidence indicator worth monitoring is the Barron’s Confidence Index. This Index is calculated by dividing the average yield on high-grade bonds by the average yield on intermediate-grade bonds. The discrepancy between the yields is indicative of investor confidence. There has been a solid improvement in the ratio since its all-time low in December, showing that bond investors are growing more confident and have started opting for more speculative bonds over high-grade bonds.

Source: Plexus Asset Management (based on data from I-Net Bridge)

Not surprisingly, a strong historical relationship exists between the Barron’s Confidence Index and the S&P 500’s 12-month rate of change.

Source: Plexus Asset Management (based on data from I-Net Bridge)

The improvement in the Barron’s indicator augurs well for the outlook for equities – specifically for the return of confidence – and provides further evidence that US stock markets are in all likelihood mapping out a base development formation. However, in the short term I still maintain it is quite likely that markets could consolidate further and possibly retrace more of the prior gains.

View original at: Investment Postcards from Cape Town

1. Credit Crisis Watch: Update – Improvement in Financial Stress IndexI have often reported on the progress that has been made on the credit front...
2. Stock markets – keep an eye on confidence measuresIt is important that confidence be restored for the recent stock market gains to be...
3. What to Do When Interest Rates RiseThe Oxford Portfolio Update – January 15, 2009 (Broadcast #838) Rising interest rates will decimate...
4. Convertible Bonds: Income Securities With Positive Equity ExposureConvertible Bonds: Income Securities With Positive Equity Exposure by Alexander Green, Chairman, Investment U Investment...
5. (EL) NFLX: The Netflix IndexNFLX: The Netflix Index Nuevo-indices, like Estee Lauder’s (NYSE: EL) “lipstick index,” the bartender index...
6. A long, cold winterThis post features a recent Barron’s interview with Stehanie Pomboy. She is the founder of...

Search Posts by Tag: | Featured

RSS Feeds by Tag: Featured |

Other Posts by: prieur | RSS Feed for this author