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Finding the Metrics That Matter

The indicators that matter most, Cramer said Friday, “can change in a heartbeat.” That was a key takeaway from the market’s collapse in late 2008 and early 2009, as well as its big move upward starting in early March of last year. So investors should always be looking for the metrics that Wall Street favors at any given moment.

“There are always new important indicators popping up that you never cared about,” Cramer said, “and the old ones outlive their usefulness faster than ever before.”

Investors want to find the indicators that measure something crucial to their present understanding of the market. Take the Baltic Dry Freight Index, for instance. This tracker of worldwide shipping rates – for iron ore, coal, grain and similar commodities – grew in importance when Chinese demand began to drive stock prices. In fact, the Baltic called its first market bottom in March 2009 when it signaled an increase in orders from the Middle Kingdom. Anyone who knew enough to watch the index had the edge.

At the same time, gold has lost its importance as an indicator. The precious metal’s price was once a key tell of investors’ fears, but now there are a number of other factors behind any move higher or lower. Developing nations are buying more gold. So, too, are commodity hedge funds that treat gold as its own asset class. And exchange-traded funds are scooping up the bullion as well. Cramer said this is still a good defensive investment, but gold can’t be relied upon to gauge market sentiment. Such was the case when gold prices ran up in 2009. People who took this as a sign to sell stocks missed the Dow’s big move higher from 6,500.

There are other indicators that wax and wane in importance. A high reading on the VIX, a volatility index, urges investors to be cautious. Then again, if the system isn’t stressed, the VIX is all but useless. There’s also the Advance-Decline index, which shows the difference between the number of stocks advancing every day versus those declining. But the advance-decline test only confirms what you already know. In the end, you have to stay flexible.

Cramer’s recommendation? Know what each indicator measures and how that directly relates to the market. Otherwise, you might end up following the wrong metric, and that could “harm you by sidetracking you from the next big move entirely.”

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