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Todd Harrison: The Smart Money Flashes Caution

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A flashing red signal coincides with all-time highs.

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 I think it's time we stop, children, what's that sound; everybody look what's going down. . .
-- Buffalo Springfield

The following description of the Smart Money Flow Index is from Bloomberg (paraphrased):

The Smart Money Flow Index (SMFI) is calculated by taking the price of the Dow Jones Industrial Average (INDEXDJX:.DJI) at 10:00 a.m. on any given day, subtracting it from the previous day's close, and adding it to the next day's closing price. The first 30 minutes represent "emotional buying," driven by greed and fear of the crowd; smart money typically waits until the end of the day.  If/when the DJIA makes a new high that is not confirmed by the SMFI, there is usually trouble ahead. Check out the chart.
 

Chart source: Bloomberg

Random Thoughts:

  • The ECB meeting tomorrow morning is the next big catalyst, with folks whispering about QE and (gasp!) the specter of negative interest rates. Listen closely to the vernacular for clues hidden in the fuse.
     
  • Bloomberg is reporting that high-frequency trading (HFT) accounts for more than 35% of spot currency volume as of October 2013, whereas it is +/- 50% of equity volume vs. 66% four years ago (Rosenblatt Securities).  I shared some thoughts on the topic yesterday in case you missed 'em; one thing for sure, there's a lot more here than meets the eye.
     
  • Biotech bounced the last two sessions although it's still in a pretty pronounced downtrend. IBB (NASDAQ:IBB) 253 to IBB 260 is tranched resistance on further lift, if and when.
     
  • Speaking of HFT, I chewed through the first five chapters of Flash Boys, the Michael Lewis book, last night. I enjoyed it, insofar as I've felt the market hasn't traded naturally in years, and I'm quite interested to see how much of that was HFT and how much was "other."
     
  • As long as the S&P 500 (INDEXSP:.INX) remains above 1850, the technical target is 1960.  The banks are supportive of that above BKX (INDEXSP:BKX) 71.50, and the trannies, small caps, and Nasdaq-100 (INDEXNASDAQ:NDX) would similarly vote "yes" with sustained moves above TRAN (INDEXDJX:DJT) 7600, RUT (INDEXRUSSELL:RUT) 1182, and NDX 3640.
     
  • VXO (INDEXCBOE:VXO) 11.60; that's 18% above all-time support and 11.60 points away from ultimate support.
R.P.

Twitter: @todd_harrison

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