Smart Money Technical Indicator

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Of the choices listed, only the Confidence Index represents a "smart money" technical indicator. The Confidence Index, published weekly by Barron's, is used to measure the degree of confidence amongst bond traders. The Confidence Index is constructed by measuring the ratio of Barron's average yield on 10 top-grade corporate bonds to the yield on the Dow Jones average of 40 bonds. The Confidence Index is designed to measure the difference in yield between high grade and more-speculative bonds. As the yield spread between the two sets of bonds narrows, (i.e. high-grade bonds are being bid down and low-grade bonds are being bid up) the ratio will approach one. Remember that the yields on high-gradebonds is always less than that on lower-grade issues, so this ratio will never exceed 1.

Technicians would view an increase in the Confidence Index as a bullish signal. The reasoning behind this opinion is relatively straightforward - more money is being directed toward speculative bonds, indicating that investor confidence in the economy is high.

"Breadth of market" refers to the measure of advancing versus declining issues. The "Diffusion Index" is a measure of market breadth and is defined as the volume of advancing issues plus one-half of the volume of unchanged issues, divided by the total number of issues traded. Short interest measures the total volume of outstanding short positions, and the sentiment of futures traders is used by contrarian technical analysts, who take a contra approach. The "Block

Uptick/Downtick Ratio" is used to measure the near-term sentiment of institutions.