Confidence Index

The confidence index (aka confidence indicator) is the ratio of high-grade corporate bond yields over other investment grade bond yields or stock yields. Barron's publishes several confidence indicators every week.

This technical indicator is predicated on the belief that market trends first appear in the bond market — as the yield spread between the 2 sets of bonds narrows, the confidence index increases. Note that the yield on higher grade bonds is lower than riskier bonds, so the confidence index will never be more than 1 and is expressed as a percentage. It is believed that the confidence index is a favorable portent to the stock market, because it indicates that investors are willing to accept a smaller risk premium for higher risk bonds; hence, their confidence in investing is increasing.