Some market signals are well-known and easily understood. Others are arcane and more-complex, but just as telling.

There's mounting evidence that the "carry trade" is ending, or that at least institutional investors are decreasing their use of it as an investment tactic.

In a carry trade, investors, especially institutional investors, borrow funds in a country with a low interest rate (or borrowing cost) and buy assets in a country where returns are higher. The investment can take many forms, including stocks, bonds, funds, or even the higher-interest currency itself.

Carry trade: A growth confidence indicator

Now, investors/readers may legitimately ask, Why is it important to know what's happening to the carry trade?

Economist Peter Dawson told BloggingStocks that it's important to monitor carry trade flows and data because it's one indicator of investor confidence in a market's ability to produce a return on equity, and by extension, in its economy to grow.

In other words, the carry trade abounds when investors are confident; it wanes when they're not, he said.

With the Japanese yen continuing to fall against the US dollar as well as higher yielding currencies such as the South African rand and the British pound, the question is whether the "carry-trade" is back on? If so, stocks may continue to rise.

What's the "carry trade"? It's an investment strategy with currencies, where investors borrow money in a currency with low borrowing costs (such as the yen) and then invest in higher yielding currencies (such as the rand or Australian dollar), earning the spread. If this trade is "back-on," then it shows that investors are more willing to take on some risk, boding well for a continued stock rally as well.

In a report on Bloomberg: "The currency weakened the most against the South African rand and the British pound, two favorites of so-called carry trades, as the cost of protecting bonds from default declined."

The report then spoke with a currency manager: "With stocks rising this much, it doesn't augur well for the yen," said Mitsuru Sahara, senior currency sales manager at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan's second- biggest lender. "Calm is returning to financial markets, and that allows currency traders to focus on rate differentials. The Fed may not have to cut rates much further.''

Keep your eyes on the carry trade to see where the markets may be heading.

Aaron Katsman is the lead Portfolio Manager and Managing Director of America Israel Investment Associates, LLC. and Senior Editor of IsraelNewsletter.com. DISCLOSURE: Writer's fund has no position in any stock mentioned, as of 5/2/08