A shrink would label Wall Street’s mood right now as “cognitive dissonance.” Optimism over dovish monetary policy is colliding with pessimism over weak corporate earnings, generating uncertainty.

Below, I’ll hand you four keys that unlock insights into imminent market moves, up or down.

Stock market performance in 2018, especially the fourth quarter, was dismal. But the market has rebounded this year, as worries over a recession and rising interest rates have subsided. On Tuesday, the S&P 500 index and Nasdaq hit record closing highs, although they’ve since pulled back.

Fact is, the triggers for a correction abound, including lofty valuations, slowing global growth, the persistent U.S.-China trade war, and a deterioration in corporate quarterly earnings growth. Analysts are forecasting that earnings will be down 3.9% by the time all S&P 500 companies post their operating results.

After a long stretch of stellar earnings growth, investors this time around are jittery over this season’s corporate report cards. Case in point: 3M’s (NYSE: MMM) earnings miss on Thursday battered the broader market. 3M posted earnings of $891 million, or $1.51 in earnings per share (EPS), in the first quarter. Adjusted for one-time costs, EPS came in at $2.23, missing the consensus expectation of $2.50. 3M also cut its full-year 2019 guidance and announced 2,000 layoffs.

With a market cap of $110 billion, 3M is an industrial colossus with fingers in many cyclical consumer markets. A Dow Jones Industrial Average component, the company is considered an economic bellwether. MMM shares plunged 12.9% yesterday, helping drag down the Dow by 134.97 points and perhaps providing a portent of what’s to come.

However, in this mixed news environment, there’s also ample reason to remain cautiously bullish. The Federal Reserve is refraining from further interest rate hikes (for now), unemployment in the U.S. hovers at a 50-year low, and U.S. gross domestic product growth remains on track, albeit on a downward slope (see chart).

*projected

As economic growth slows and the stimulus of the U.S. corporate tax cut fades, how can you stay active in the stock market, yet protect yourself from danger?

The great traders such as Warren Buffett govern their buying-and-selling activity through patience and the dispassionate application of value criteria, but they also learned to observe crucial signs when the market is about to rise or fall.

Ride the Bull, Beat the Bear

In today’s risky investment climate, you can stay a step ahead of the game by learning these four proven market-timing indicators. They’ll help you ride the bull, or if necessary, beat the bear.

1) Buy when the stock market is showing the classic signs of bottoming out (and sell when the market is at a top).

The goal of market timing is to recognize the best opportunities to buy low and sell high. So it makes sense to buy into a position at its lowest point and sell at its highest. However, even experienced fund managers have trouble finding the market’s “tops” and “bottoms” consistently. A good rule of thumb for identifying these extreme peaks and valleys is to look for extreme behavior.

Classic signs of a bottom include hyperbolic pessimism in the media; extremely high “bear” signals from professional stock analysts; heavy insider buying at corporations; and huge mutual fund cash reserves.

On the other hand, if it feels like the market is in a buying frenzy, it’s probably a good time to sell (or hold off on buying). In this vein, Buffett famously explained how he decides when to buy or sell a stock: “Be fearful when others are greedy and greedy when others are fearful.”

2) Follow the “corporate insiders.”

The shrewdest investors are the “corporate insiders,” the officers and directors of publicly traded companies. These people know much more about their organizations than an analyst or broker.

To ensure that these insiders aren’t using that knowledge to exploit non-public information, the U.S. Securities and Exchange Commission (SEC) requires them to report their transactions.

You can view these documents on the SEC’s website, which maintains the EDGAR (Electronic Data Gathering, Analysis, and Retrieval) database. Just click “Search for Company Filings.”

Mandatory reporting helps level the playing field for individual investors. Knowing when insiders are buying and selling can be a great indicator of which direction a stock is heading.

This sort of legal insider trading shouldn’t be confused with illegal insider trading. As defined by the SEC: “Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, on the basis of material, nonpublic information about the security.”

As for the legal variety? Well, think about it: Corporate insiders are the ultimate advisors. They have a very deep and comprehensive understanding of their company and industry. They are intimately involved with all aspects of their company. And just like you and me, it’s in their best interest to buy low and sell high.

So does following insider trading really work? History has shown that stocks heavily purchased by insiders outperform the broader market averages by roughly 2-to-1 in a bull market and fall only half as far in a bear market.

In addition, stocks characterized by heavy insider selling tend to rise only half as much as the market averages when the primary trend is bullish and fall twice as hard when the primary trend is bearish.

Remember, following insider transactions is not as easy as mimicking their every move. Many insiders frequently buy and sell shares for a number of reasons.

3) Buy if the market has gone above the 50- or 200-day average.

The moving average is a great line to judge whether or not a stock is technically healthy. Extremely high averages are a warning that the market is too optimistic, and fresh buyers are rare (because everyone already owns it). When this happens, the market will likely reverse, and the stock will begin to fall.

Conversely, a very low moving average is a signal that a bottom is near. When the stock price starts to rise and finally crosses its low moving average, it’s a very bullish signal. The shorter the moving average, the sooner you’ll see an actual change in the market.

4) Observe the put/call ratio for signs of frenzied “fast buck” behavior, and bet AGAINST the gamblers.

This tool is a handy contrarian indicator that helps you gauge overall market sentiment. It’s easy to calculate: Just divide the number of traded put options by the number of traded call options.

Speculators buy puts when they anticipate a stock will go down; they buy calls when they anticipate a stock will go up. So the put/call ratio simply measures whether more investors are feeling bearish or bullish. If there are more bearish investors, the ratio will be larger. When the ratio is large enough, it can signal an unwarranted bearish outlook that will soon adjust.

The data used for the put/call calculation is available on the website of the Chicago Board Options Exchange (CBOE). A reading above 0.8 on the 10-day moving average of the CBOE put/call ratio suggests a big buying opportunity; when the ratio drops below 0.4, a big drop in the market is probably imminent.

This article provides only a sampling of the major, most popular market timing indicators. There are many other timing indicators, some of them quite complex. Regardless of which you follow, always remember this rule of thumb: No market timing system can compensate for poor stock selection. Only use market timing in conjunction with other fundamental metrics.

Got any questions about these four trading tools? Drop me a line: mailbag@investingdaily.com

John Persinos is the managing editor of Investing Daily.