The Three Charts You Need to Watch

If you invest in the stock market, you need to track the three charts below. These three charts could predict the direction of the stock market... 

One or two stock sectors always lead the market. In the late 1990s and early 2000s, it was technology and Internet stocks. These stocks went up the most in the bull market and fell the most in the bear market. 

In the bull market of 2003 to 2007, multiple stock sectors led the market, from housing to finance, energy, emerging markets, construction, and even infrastructure. These "hot money" favorites drove the market higher in the boom and then dragged it down in the bear market. 

Jesse Livermore is one of the most famous traders who ever lived. He built several multimillion-dollar fortunes in the early 20th century by trading stocks. I won't say he was successful, as he went broke at least three times. But he did contribute his knowledge and trading wisdom to one of the best trading books of all time, Reminiscences of a Stock Operator. 

Livermore believed the market leaders are your best indicator for the direction of the stock market in general. As the leaders go, he said, so goes the entire market. 

I track a list of 86 exchange-traded funds (ETFs). Every week, I calculate which ETFs have risen and fallen the most in the last three months. Emerging markets, construction, commodities, and financial stocks have led the recent market rally, which took the S&P 500 from 666 to 950 over the last three months. 

Russia's ETF was the top-performing country ETF for nine weeks in a row. Russia is simultaneously an emerging market and commodity play. The Russian economy is highly leveraged to oil and gas... and Russian investments are an emerging market "hot money" favorite. However, it might be starting a new downtrend: 


The financial sector is the most important industry in America, if not the world. It received more bailout money than any other sector... and people think the health of the financial sector determines the health of the economy. The financial ETF rose 122% from the low to the high. But this chart could be rolling over, too: 


Finally, take a look at this chart of the homebuilding ETF. It represents the health of the American construction industry, the basic materials industry, and the real estate market. This chart has been on fire for the past three months... but it doesn't look pretty either: 


If you invest in the stock market, you need to pay attention to these three charts. They represent the most prominent stocks in the market. As their prices go, so will go the stock market. 

Right now, these charts are hinting at a new downtrend. It's probably time to hold off on new buys... and time to make sure you mind your stop losses to protect profits. 

Good investing, 

Tom