This Chart Will Help You Predict Stock Market Direction
Risk Appetite by Wall Street Helps Investors See Where Market is Going Next
There is no single perfect indicator, but this is an excellent leading indicator to help manage risk in the stock market.
The above chart has 2 panels. The top panel is the relationship between growth stocks and value stocks. If the purple line is rising, Wall Street is rotating to riskier stocks – this is good for the market. When the line is falling, it indicates institutions are rotating toward value (or safe haven) type stocks.
The bottom panel is the S&P 500.
We’ve outline 5 phases since May of 2023 in this chart.
Phase 1: the stock market rose, but there was a clear indication that Wall Street was rotating out of growth stocks (this is a stark warning of a change ahead).
Phase 2: as the market sold off from August through November, Wall Street was quietly snapping up shares of growth (risky) stocks while retail traders were panic selling.
Phase 3: The rise in the stock market from November to late February 2024 was “genuine”. Pullbacks were buying opportunities as Wall Street remained in “risk on” mode (purple line rising).
Phase 4: Wall Street began rotating toward value stocks as the stock market continued to climb from February into April 2024. This was again a strong warning signal that a selloff could be imminent.
Phase 5: This phase is still “under construction”. The market has sold off and we’re not yet seeing any clear indications Wall Street is done with their selling.
The late April bounce may certainly have been “the bottom” but we’re a bit skeptical. We need to see more broad-market indicators tell us it’s safe to go back in.