The first indicator that can help you predict whether the Stock Market is going to rise, or fall is deemed the BE/ME Ratio. No, this is not a measure of how much you love yourself, but rather how much the Market loves a Company. The BE/ME ratio stands for Book Equity to Market Equity, and it compares how much a Company’s Assets are worth on paper versus how much they are worth on the Stock Market. A high BE/ME ratio means that the Market is undervaluing a Company, and a low BE/ME ratio means that the Market is overvaluing a Company. Generally, when the average BE/ME ratio of the Stock Market is high, it means that the Market is in a bad mood and expects lower future earnings. This can signal a recession or a, "Bear Market". On the other hand, when the average BE/ME ratio of the Stock Market is low, it means that the Market is in a good mood and expects higher future earnings. This can signal a recovery or a, "Bull Market". The S&P 500 Book to Market is 4.21, today. The Median is 2.81. There is still a lot of, "love," baked-in and I expect a downturn... However, as Jim Cramer often says, "There's always a Bull Market somewhere"!
The second indicator that can help you spot a Stock Market recovery is the performance of Small-Cap Stocks versus Large-Cap Stocks. Small-Cap Stocks are shares of Companies that are relatively small and unknown, like your local Mom-and-Pop Store or your Cousin’s Garage Band. Large-Cap Stocks are shares of Companies that are relatively big and famous, like Apple or Coca-Cola. Small-Cap Stocks tend to be riskier and more volatile than Large-Cap Stocks, but they also offer higher potential returns. Small-Cap Stocks are more sensitive to changes in the economy and consumer demand than Large-Cap Stocks, which are more stable and diversified. Therefore, when Small-Cap Stocks do better than Large-Cap Stocks, it means that the economy is growing, and consumers are spending more. This can indicate a Stock Market recovery. On the other hand, when Small-Cap Stocks do worse than Large-Cap Stocks, it means that the economy is shrinking, and consumers are saving more. This can indicate a Stock Market downturn.
The third indicator that can help you detect a Stock Market recovery is the level of insider buying activity. Insiders are people who know more about a company than you do, like executives, directors, or major shareholders. Insider buying activity refers to how many Shares of their own Company insiders buy or sell. Insider buying activity can reveal how confident and optimistic insiders are about their Company’s future performance. When insiders buy more Shares of their own Company, it means that they think that their Company’s prospects are improving and that its Stock price will go up in the future. Broadly, insider purchases can signal a Stock Market recovery. On the other hand, when insiders sell more Shares of their own Company, it means that they think that their Company’s prospects are worsening and that its Stock price will go down in the future. This can signal a Stock Market decline. Marketbeat.com offers a simple page that reveals Insider Activity; Marketbeat's Trading Tracker. If you're using E*Trade, News will often be displayed in your Portfolio's News Feed too!
These are three of the key indicators that can help you recognize a Stock Market recovery. However, don’t just rely on one indicator alone, but use a combination of different indicators and sources of information to make smart decisions. Also, be aware of the limitations and uncertainties of these indicators, as they may not always reflect the true state of the economy or the Market. And remember, Investing in the Stock Market is always risky and unpredictable, so don’t put all your eggs in one basket, and don’t bet more than you can afford to lose.
