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Todd Harrison: The Smart Money Strikes Again


The largest divergence since 2007 screams for attention.

Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter where subscribers can follow over 30 professional traders as they share their ideas in real time. Want access to the Buzz plus unlimited market commentary? Click here to learn more about MVPRO.

I'm learning to fly but I ain't got wings; coming down is the hardest thing.
-- Tom Petty, "Learing to Fly"

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.

When we first posted this chart, last Wednesday, April 2, we warned, the smart money is flashing caution.

Chart courtesy of Bloomberg

Since that point, the Dow Jones Industrial Average has lost 452 points -- and that does not include today's Freaky Friday price action.

This morning, we revisited the Smart Money Index, courtesy of Bloomberg, and found the charts below. The first is an apples-to-apples format that we used last week. 

Chart courtesy of Bloomberg
The chart below is the Smart Index-Dow Jones Industrial average spread since 2005 (the difference between the two). You will note that the current chasm between the "smart" money and the rest of the tape is at a divergence last seen in 2007.

Chart courtesy of Bloomberg

There is no Holy Grail when investing, but there are, on occasion, signals that provide the right insight at the right time. This may be one of them.

Random Thoughts:

  • Yesterday on our real-time Buzz & Banter, we wrote, "The financials lagged the tape during the recent rally; today they're outperforming to the downside. Something to note; as go the piggies, so goes the poke." This morning, obviously, JPMorgan (NYSE:JPM) provided reason for that rhyme when it missed earnings.
  • High-beta remains a battleground with Google (NASDAQ:GOOG), Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX), Tesla (NASDAQ:TSLA), and LinkedIn (NYSE:LNKD) caught in the crossfire on a daily basis. This is the "other side" of momentum, and it's a first for many of those playing that game.
  • Gold has two primary technical toggles: the 200-day at 1300 and the 50-day at 1315. The reaction in and around those moving averages will help define the direction for the next leg of the yellow metal. 
  • Biotech, as measured by the iShares NASDAQ Biotechnology Index ETF (NASDAQ:IBB), is sitting on the 200-day moving average, or at least it was on the opening, for the first time since late 2012.  IBB 219 is the level to watch there.
  • My cannabis proxies have been hammered of late as well; I would list some of them but we don't discuss stocks with less than a $500 million market cap in these parts. I have, however, updated my thoughts in this space, lest you missed it.
  • "Credit of a different breed, that of credibility, will be the issue at hand for markets at large."  I said that in 2007, and it still holds true.  And now, just like then, there are a whole lot of people who only traded an up tape for five years.
  • Of course, depending on the close, there are many who will view this price action as healthy. Technical levels help frame that conversation, and there are more and more stocks and sectors putting in patterns of "lower highs."
  • I wonder if biotech stocks are leading this tape like homebuilders led the tape in 2007; I suppose that remains to be seen.
  • I shared some stock market perspective late yesterday, and the 10-year chart of the Nasdaq (INDEXNASDAQ:NDX) jumped out and bit me.
Nestled within that chart is a housing bubble and bust, the financial crisis, high-frequency trading, multiple central bank interventions and countless Fed jawbones. Not too bad, all things considered; but that was then.

  • On a housekeeping note, I will be traveling next week with the kids to spend the holidays with the great-grandmothers in Florida.  Well, for a few days, and then some down time before coming back and hitting it hard. Good luck, and may peace be with you.

Twitter: @todd_harrison

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