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Smart money continues to trend higher with the stock market

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Summary:
The S&P fell 4 weeks in a row and has now rallied 5 days in a row. This has been a rather sharp reversal, which isn’t surprising given the current news-driven environment. Today’s headlines: Smart Money Flow Index continues to trend upwards. Bearish shooting star S&P’s momentum Corporate bond yields NYSE advance-decline line New highs expansion The S&P today is just like… Go here to understand our fundamentals-driven long term outlook. For reference, here’s the random probability of the U.S. stock market going up on any given day. Smart Money Flow Index The Smart Money Flow Index is calculated by adding the Dow’s change in the last hour of each day and subtracting the Dow’s change in the first 30 minutes of each day. The Smart Money Flow Index is based on the idea that “smart

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The S&P fell 4 weeks in a row and has now rallied 5 days in a row. This has been a rather sharp reversal, which isn’t surprising given the current news-driven environment. Today’s headlines:

  1. Smart Money Flow Index continues to trend upwards.
  2. Bearish shooting star
  3. S&P’s momentum
  4. Corporate bond yields
  5. NYSE advance-decline line
  6. New highs expansion
  7. The S&P today is just like…

Smart money continues to trend higher with the stock market

Go here to understand our fundamentals-driven long term outlook. For reference, here’s the random probability of the U.S. stock market going up on any given day.

Smart money continues to trend higher with the stock market

Smart Money Flow Index

The Smart Money Flow Index is calculated by adding the Dow’s change in the last hour of each day and subtracting the Dow’s change in the first 30 minutes of each day.

The Smart Money Flow Index is based on the idea that “smart money” trades in the final hour of each trading day while the “dumb money” trades at the start of each day (reacts to the news). We’ve talked about why this theory is flawed before, but it nonetheless remains a popular theory.

While the Smart Money Flow Index collapsed in 2018, it has been trending upwards throughout 2019. This index has been above its 50 day moving average for 97 consecutive days, which is a long streak.

Smart money continues to trend higher with the stock market

Similar historical cases were mostly bullish 2-3 months later.

Smart money continues to trend higher with the stock market

Smart money continues to trend higher with the stock market

Here are the historical cases’ drawdowns.

Smart money continues to trend higher with the stock market

Bearish shooting star

The S&P rallied 5 days in a row, and made a bearish “shooting star” candlestick pattern today.

*Shooting star = open and close at the LOW of the day. Implies the rally was faded during the day.

Smart money continues to trend higher with the stock market

It’s easy to automatically assume that this is bearish. That’s what I thought too, until I ran the numbers.

Here’s what happens next to the S&P when it rallies 5 days in a row and then makes a shooting star.

Smart money continues to trend higher with the stock market

Smart money continues to trend higher with the stock market

Smart money continues to trend higher with the stock market

Sample size is small, so it’s hard to take this as a bullish argument. But at the least, it’s not a consistently bearish factor for stocks.

Momentum

To increase the sample size of the previous study, let’s just look at every historical case in which the S&P rallied 5 days in a row after falling to a 2 month low, while above its 200 dma.

Smart money continues to trend higher with the stock market

Smart money continues to trend higher with the stock market

Smart money continues to trend higher with the stock market

While these “5 days up” streaks eventually end, the S&P tends to push higher 2-4 weeks later. HOWEVER, I do not think predicting the short term is wise right now, given how much the market is influenced by trade news on a day to day basis.

Smart money continues to trend higher with the stock market

Baa corporate bond yields

Baa corporate bond yields continue to fall. Their 6 month rate-of-change is now below -10% as of May’s close.

Smart money continues to trend higher with the stock market

Historically, this was mostly a bullish factor for stocks on all time frames.

Smart money continues to trend higher with the stock market

Smart money continues to trend higher with the stock market

Breadth

While some market watchers have discussed the S&P’s similarities between today and 2007, I’d like to point out a notable difference.

The NYSE Advance-Decline Line is on the verge of making a new high.

Smart money continues to trend higher with the stock market

Major historical bear markets usually saw the Advance-Decline Line trending downwards before a bear market began.

Here’s 2007 (before the 2007-2009 bear market):

Smart money continues to trend higher with the stock market

Here’s 2000 (before the 2000-2002 bear market):

Smart money continues to trend higher with the stock market

Here’s 1973 (before the 1973-1974 bear market):

Smart money continues to trend higher with the stock market

Here’s 1968 (before the 1969-1970 bear market):

Smart money continues to trend higher with the stock market

Is this an outright bullish sign? No. Hard to make a conclusion based on n=4. But at least this demonstrates a key difference between today and 2007.

New highs expansion

The % of issues on the NYSE making new highs has increased to more than 9% for the first time since early-2018.

Smart money continues to trend higher with the stock market

Here’s what happens next to the S&P when the NYSE New Highs Percent exceeds 9% for the first time in over 200 days:

Smart money continues to trend higher with the stock market

Smart money continues to trend higher with the stock market

Smart money continues to trend higher with the stock market

Smart money continues to trend higher with the stock market

Slightly bullish 1 month later. But again, I think predicting the short term is a 50/50 bet right now given the news driven environment.

About those analogues

Analogues are very popular because they give traders a false sense of certainty. The problem is simple:

  1. Chart watchers tend to cherry pick whichever analogue suits their bias.
  2. The market always “looks just like (whatever year suits your bias)” if you squeeze, compress, stretch, and change the scales.
  3. Sample size of n=1
  4. History never exactly repeats itself.

That’s why I’ve seen different analysts and market watchers present completely different analogues to support their bias

“The S&P today looks just like 2007!!!” (very bearish)

Smart money continues to trend higher with the stock market

“The S&P today looks just like 2016!!!” (very bullish)

Smart money continues to trend higher with the stock market

Here’s my favorite analogue.

“The S&P today looks just like Bitcoin in 2017!!”

Who’s ready for the S&P to go to 17,000 in the next 6 months? 😉

Smart money continues to trend higher with the stock market

We don’t use our discretionary outlook for trading. We use our quantitative trading models because they are end-to-end systems that tell you how to trade ALL THE TIME, even when our discretionary outlook is mixed. Members can see our model’s latest trades here updated in real-time.

Conclusion

Here is our discretionary market outlook:

  1. The U.S. stock market’s long term risk:reward is not bullish. In a most optimistic scenario, the bull market probably has 1 year left.
  2. Most of the medium term market studies (e.g. next 6-9 months) are bullish, although a few of trend following studies are starting to become bearish.
  3. Market studies for the next 2-3 months lean bullish
  4. Market studies over the next 1-2 weeks are mixed (some bullish and some bearish). Trade war news only adds to this uncertainty.
  5. We focus on the medium-long term.

Goldman Sachs’ Bull/Bear Indicator demonstrates that risk:reward does favor long term bears.

Smart money continues to trend higher with the stock market

Click here for more market analysis

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