Barron’s Confidence Index Indicates Bottoming for Equities

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.

Click to enlarge:

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.

Click to enlarge:

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 U.S. 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.

Comments

[jeandit75:]

I am happy you ended by the however markets could consolidate cause it seems like no one cares about systemic risks anymore.

Jul 03 07:17 AM

[Moon Kil Woong:]

This is a very false indicator. The widening spread is people trying to go from low yield to high yield in the fact of potential inflation more than anything else. It is true they are paying less attention to risk factors or you could say the risk of inflation is matching or exceeding the risk of riskier bonds. Either way, it proves 0 about economic confidence.

It's just another green shootist fantasy. Just like looking at unemployment change suddenly became a leading indicator from a lagging one. And now that unemployment is on the rise it becomes a lagging indicator again. At least green shootists should stick to one argument or the other. They said rising commodities where also signs of a recovery. Oh really? I wonder where that bull will turn out to be? You can have rising commodities simply because your currency devaluates or there's inflation. Does inflation always mean economic growth? My foot!

Jul 03 08:17 AM

[dcb:]

As mentioned before, you're smarter than me. the headline is just the story given to the media to try and justify the stock market move. this allows the masses to think there is some rational reason behind the move and continues to try and justify the faulty rational market theory. the entire industry is set up on this, so it has to try and keep it going.

I for instance could see no reason based why the unemployement should have moved things down this time, the prior week consumer confidence came in at one point above the all time low (in another survey) and that didn't do anything.

the best indicator manufacturing still neg is less neg, which should have been a pos for the market.

People have the analysis all wrong, the market moves (most of the time) and people make up the reason later. sometimes there are real events. It goes down because people take profits and are afraid it aint going higher, or it is going down because the goldman prop desk has decided to change what it wants the market to do.

We will only start to have a real dialog when the real reasons for movement are addressed and when the public starts to realize the market is not usually reality based. This illusion must be maintained by the industry at all costs (retirements, pension funds) trillions are at stake. At lest the bond market appears to be driven by more logic.

Fist step in the revolution is to get rid of the way the press decides to report market movements. But they must clearly realize by now things don't make sense, but go along with it. Just like you said. employement matters one week and not the next?


On Jul 03 08:17 AM Moon Kil Woong wrote:

> This is a very false indicator. The widening spread is people trying
> to go from low yield to high yield in the fact of potential inflation
> more than anything else. It is true they are paying less attention
> to risk factors or you could say the risk of inflation is matching
> or exceeding the risk of riskier bonds. Either way, it proves 0 about
> economic confidence.
>
> It's just another green shootist fantasy. Just like looking at unemployment
> change suddenly became a leading indicator from a lagging one. And
> now that unemployment is on the rise it becomes a lagging indicator
> again. At least green shootists should stick to one argument or the
> other. They said rising commodities where also signs of a recovery.
> Oh really? I wonder where that bull will turn out to be? You can
> have rising commodities simply because your currency devaluates or
> there's inflation. Does inflation always mean economic growth? My
> foot!

Jul 03 08:35 AM

[dcb:]

I have been predicting a correction to Dow 7500 then long term bull market. Of course with the markets being driven up and down by trading desks who knows. the interesting thing is that they want people to invest in stocks, but by allowing the kinds of manipulation they do they have lost an entire generation. the liquidity isn't going to be the same.

The goldman prop desk driven drop from jan to march straight down day after day has destroyed the american stock market. Knowing what I do know and watching foreign markets trade more rationally I advise my friends to never buy and american stock again. if the government want to let it be manupulated for the benefit of wall street fine with me, they will loose business (have already done so) and it isn't in theor long term interest. But since when has wall street worked in it's long term interest. this is why the american people should let them have their party but refuse to come. Lets see how well they do then!!!

Jul 03 08:42 AM

[John Galt:]

I think trying to quantify "confidence" is challenging. Moon Kil Woong points out there there are even other variables in your data point ( the 800 pound guerilla that has people spooked in this case is inflation).

So are investors more confident because they think things are getting better or are they more confident because they are being TOLD things are getting better... errr getting worse at a slower pace?

Are investors more confident because things are getting better or are they more confident because the stock market has been going up instead of down?

Are investors more confident, or are they worried about inflation?

Jul 03 09:19 AM

[Zircon - 212:]

PdP...surely you can do better than that. The market should go up, but it might also go down. Save some ink next time and cut your words of wisdom short.

Jul 03 09:34 AM

[nobby73:]

I don't mean to be rude, but I think this is nonsense. If you are looking at risk vs risk aversion, you should be looking at the risk factor, ie the spread over Treasuries, not the absolute yield. The shape of the graph is highly impacted by the change in the treasury yields, as the extremely low treasury yields amplified the difference between high grade vs intermediate shown in the December area.

Jul 03 06:00 PM

[Swashbuckler:]

In terms of predictive value, I doubt Barron's Confidence is any more accurate than dozens of other widely followed indicators.

Jul 03 06:04 PM

[Larry House:]

It is premature to go after more risk in bonds or equities. My confidence measure is made up of the people I know and talk to and hear their comments. It's not better. Now is the time to be totally defensive. Now I will grant that the market could rise more from here, but consider the risk to potential loss. The percentages are against the investor right now. This is a trader's market.

Jul 03 06:20 PM

[Mr. Ed, Jr.:]

"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."

I really don't want to think about this calculation, but for those who routinely deal with "discrepancy between the yields " (I am getting a headache just typing that)... Is there a real world correlation that would explain this ? Does such a "discrepancy" have any meaning, or is it just noise ? Or voodoo ?

What was the correlation prior to Jan '05 ?

I need to stop now. If I ask another question about this, it may do brain damage. To me, as well as anyone reading this.

Jul 03 08:02 PM

[Peter Cooper:]

Confidence ahead of reality surely indicates a market fall not an rise?
Shorting the S&P 500 looks like the best trade to me right now, see:
arabianmoney.net/2009/.../

Jul 04 02:58 AM

[ETETET:]

I don't think so. your chance of winning is less than 50%.


On Jul 04 02:58 AM Peter Cooper wrote:

> Confidence ahead of reality surely indicates a market fall not an
> rise?
> Shorting the S&P 500 looks like the best trade to me right now,
> see:
> arabianmoney.net/2009/.../

Jul 04 12:20 PM

[ETETET:]

I don't think so. ur chance is less than 50%


On Jul 04 02:58 AM Peter Cooper wrote:

> Confidence ahead of reality surely indicates a market fall not an
> rise?
> Shorting the S&P 500 looks like the best trade to me right now,
> see:
> arabianmoney.net/2009/.../

Jul 04 12:23 PM

[Chandragupta:]

I don't understand the statement "....a strong historical relationship exists between the Barron’s Confidence Index and the S&P 500’s 12-month rate of change....". It only means if the indicator is bullish today, it was a good time to buy 12 months ago. In fact, if an indicator is bullish today, it means it is useless. Just look at the gloomy news all around you.

Jul 04 01:12 PM

[whidbey:]

At best a coincident indicator, not a future indicator, but what would you bet that the Treasury QE has biased the data?

The Fed buys down the long end of the curve in the hope of lowering the mortgage lending costs. Be careful when we know the government is manipulating interest rates. Frankly there may also be some recession fatigue, but it is akin to drinking salt water on a raft at sea; you will pay for it dearly later.

Jul 04 02:55 PM