The number of true-tested, without-fail methods to tell which way stocks will go on any given trading day is as long as the Brooklyn Bridge.

From watching action in the post-trade overnight markets to measuring ticks in pre-trade market futures to gauging the depth, breadth and ‘vol’ of the Asian markets, there are many ways to skin that cat.

How successful they are is anyone’s guess (though certainly everyone would be rich if they were indeed successful). But a recent stab at measuring some U.S. lending spreads by some market watchers does appear to at least show whether or not the market is behaving rationally – and in turn provide a heads-up of sorts on when a particular sector is going to change course.

As the theory goes, by examining the S&P Securities Lending Spread Indices, which measure the spread between the Fed Funds Open Rate and the Rebate Rate, or cost of borrowing, equities in the U.S. markets, one can get a rough idea of whether a particular sector is about to take a dive, or vice versa. S&P launched these indices in September at a pretty granular level for U.S. stock sectors.

Without getting too technical, the premise is as follows: When one sees a positive spread, it means the Rebate Rate is below the Fed Funds Open Rate, and borrowers are paying lenders to borrow stock. In other words, the market is working accurately.

Conversely, when one sees a negative spread, it means that lenders are paying borrowers for those borrowers to keep their stock out on loan. This has been happening since the credit crisis last year, but it is old news. More…