3. Confidence index
Barron’s computes a confidence index using data
from the bond market. The presumption is that
actions of bond traders reveal trends that will
emerge soon in the stock market.
The confidence index is the ratio of the average
yield on 10 top-rated corporate bonds divided by
the average yield on 10 intermediate-grade
corporate bonds. The ratio will always be below
100% because higher rated bonds will offer lower
promised yields to maturity. When bond traders
are optimistic about the economy, however, they
might require smaller default premiums on lower
rated debt. Hence, the yield spread will
narrow, and the confidence index will approach
100%. Therefore, higher values of the confidence