4 min read

Bullish or Bearish? How to Watch for Market "Signposts"

While the Russell 2000 has been weak the S&P 500 and Nasdaq have hit new all-time highs for months. So the overall market may not be as healthy as it appears on the surface.
Bullish or Bearish? How to Watch for Market "Signposts"
Photo by Jeremy Zero / Unsplash

Today I want to spend a few minutes talking less about individual stocks, and more about how I look at stock market "signposts."

When we drive on the highway, there are signposts telling us what road we're on, how far the next town is, and so on.

I'll never know the real direction of the stock market ahead of time, but I try to find the same potential "signpost" clues wherever I can.

Watch the video, or read below for more insights!

I disagree with folks who say we should invest regardless of the overall market.

Warren Buffett is someone who says this often.

Warren Buffett via Wikipedia

I respect his opinions - he has $150 billion reasons to be right about these things. But for all of us as ordinary investors - we're not like mutual funds, pension funds, or hedge funds, where there's always more money coming in the door each week.

Our supply of money is relatively finite, right?

So we need to pay attention to the market - not obsessively so. But what I tell my premium subscribers all the time is 'eyes wide open.'

We don't want to be Little Red Riding Hood walking through the forest, oblivious to our environment.

Little Red Riding Hood, found in an abandoned garden.
Photo by Michael Kroul / Unsplash

If we see a wolf lurking in the shadows, it might be a friendly wolf or a dangerous one. But at least we know the potential risk or reward that comes with having that information.

Signposts to Watch

Something I look at a lot...is comparing different parts of the market to each other...the S&P 500, the Nasdaq, the Dow and especially the health of the Russell 2000 index.

The R2K is important because it represents the smalliest, riskiest, and fastest-growing companies in the stock market. So this is where we get a chance to gauge whether investors are happy taking large risks, small risk, or no risk - by how this index behaves.

A good example happening right now...

The Russell 2000 isn't "acting" very well. It hit its all-time high back in March and has been fading bit by bit. It's down about 7.5% since then.

What does this information tell me?

For one, if I'm putting money into a small company stock, or an ETF or mutual fund that has a lot of them in there...it explains why my bets probably aren't working out very well right now.

All of that could change tomorrow, of course. But if you're wife says, hey you put our money into X-stock. Why aren't we rich already? At least now you have a potential answer..

A few stocks have the ability to swim "upstream" so to speak, against the overall trend of their index. By definition though, if the index is falling, then the stocks within that index are falling as well.

It also helps us to see potential vulnerabilities within the market.

I say "potential" because this is like a game of poker.

poker game (20111207)
Photo by Michał Parzuchowski / Unsplash

We don't know all the cards that our opponent...Mr. Market...holds in his or her hand.

For example, right now there's a potential vulnerability.

While the Russell 2000 has been weak - going sideways literally for most of this year - the S&P 500 and Nasdaq have continued to hit new all-time highs almost every week. It's been happening for months.

It could all change for the better tomorrow. But at least we see one of "Mr. Market's" cards now. We know that investors just aren't interested in small stocks. They don't want to take that level of risk.  

It gives me 2 other insights.

One, there are probably some fast-growing, healthy companies within small cap stocks that are being "given away" at valuable prices.

That was a point I made when I recommended Moderna (MRNA) in one of my first videos this year.

The stock had been temporarily thrown away by investors. That's why I said in the video I thought the stock could double or triple in value this year - and it has.

The other insight?

It tells me that the current state of the overall stock market may - may - not be as healthy as it appears on the surface.

It's sort of like being on a small ferry boat. If everyone rushes to one side, the boat loses its balance and runs the risk of flipping over. A disaster strikes.

Likewise, if one part of the stock market becomes way too popular with investors - they run the risk of capsizing the market as well.

Most of the time, these things have a way of evening themselves out.

But at least now I have my "eyes wide open" on where the potential risks and rewards are in this stock market.

Best of goodBUYs!