Picture du Jour: Stock markets – it’s all about confidence
Source: http://www.investmentpostcards.com/2009/05/05/picture-du-jour-stock-markets-%e2%80%93-its-all-about-confidence/Posted on Tuesday, May 5th, 2009 | In Market Commentary
A key requirement for the recent stock market gains to be more enduring and for the bear’s corpse to be put to rest, is the restoration of investor confidence. A few comments regarding this issue are highlighted in this post.
As shown in Sunday’s “Words from the Wise” review, 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.
Not surprisingly, a strong historical relationship exists between the Barron’s Confidence Index and the S&P 500 Index’s 12-month rate of change.
Click on the image below for a larger graph.
The improvement in the Barron’s indicator augers well for the outlook for equities – specifically for the return of confidence – and provides further evidence that US stock markets are mapping out a base development formation. The early January highs and 200 day-moving averages are the next important targets and a break above these levels would signal the completion of the base formation and a secular bottom (as has already been seen in leading markets such as China and Brazil). (The Nasdaq Composite Index is also already above its January high and 200-day line.) Meanwhile, the speed and magnitude of the rally argue for markets to consolidate and possibly retrace some of the past eight weeks’ gains prior to launching an attack on longer-term indicators used to distinguish between primary bull and bear markets .
Last 5 posts by Prieur du Plessis
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Brazil, Cape Town, China, investment postcards, Market Commentary, Nasdaq Composite, Sp 500, United States
 About Prieur du Plessis (http://www.investmentpostcards.com)
Prieur du Plessis has 25 years’ experience in professional investment research and portfolio management. More than 1,000 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns. He has also published a book, Financial Basics: Investment. Prieur is chief executive and principal shareholder of South African-based Plexus Asset Management, which he founded in 1995. The group conducts investment management, investment consulting, private equity and real estate activities in South Africa and other African countries. Plexus is the South African partner of John Mauldin, author of the Thoughts from the Frontline e-letter, and also has an exclusive licensing agreement with California-based Research Affiliates for managing and distributing its enhanced Fundamental IndexTM methodology in the Pan-African area. Prieur is 52 years old and lives with his wife, television producer and presenter Isabel Verwey, and two children in Cape Town, South Africa. His recreational activities include long-distance running, motor cycling, traveling and reading. |
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