An indicator based on the first hour versus last hour of stock trading has undergone a shift similar to those seen at the prior 2 cyclical tops.
We’ve written about the intraday “Smart Money Indicator” on several occasions throughout the years, including last March. This post echoes that one from March almost word for word as the message is the same. The only difference is that our confidence in the interpretation of its present behavior is much higher now based on the evidence.
The theory goes that trading done in the stock market early in the day is indicative of the eager and emotional “dumb money” reacting to developments occurring since the prior day’s close. Conversely, trading during the final hour of the day is representative of the more deliberate and calculating “smart money” traders. While there is certainly no way to prove (or disprove) this notion, taking measure of the early and late-day trading patterns can elicit some interesting observations, present circumstances included.
One researcher that tracks such data is Jason Goepfert at Sentimentrader.com. Goepfert subtracts the day’s change in the S&P 500 after the first half hour of trading and adds the change that occurs in the final hour of trading. He then tracks the cumulative running tally of the daily readings in what he calls the “Smart Money Indicator” (SMI). The SMI is exhibiting some interesting behavior currently. After generally trending lower since the March 2009 stock market low, and in particular during the relentless rally since 2012, the SMI has begun to curl upward. This is noteworthy since we saw the same behavior near the cyclical tops in 2000 and 2007.
You might be thinking “shouldn’t the Smart Money Indicator trend upward during bull markets and downward during bear markets?” The main culprit here is the effect of opening gaps. Since the day’s change after the first half hour is subtracted from the SMI, gaps up to begin the day (unless completely unwound by the end of the first half-hour) would negatively impact the SMI. And big gaps up, and/or a lot of them, would contribute to a declining SMI even as the market is rallying. Conversely, persistent gaps down would contribute to a rising SMI.
Whatever the case may be regarding the mechanics of the SMI, a glance at the chart indicates that its behavior over the past 18 years is pretty straightforward. The major inflection points have occurred near significant tops and bottoms in the S&P 500. Lows in the SMI occurred at the end of 2000 and the end of 2007, just as the stock market was entering into cyclical bear markets. A potentially similar low may have occurred in August last year.
There is no guarantee that the developing shift in the Smart Money Indicator will continue higher. Indeed, we discussed potential turns in July 2014 and last March, both of which failed to follow through. This recent turn, however, is much more dramatic and convincing as the SMI is making a clear higher high above its transitional peaks of the past 20 months. If this move in the SMI does follow the course of its predecessors in 2000 and 2007, it could indicate a longer-term shift – lower – in the market’s trading behavior.
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via Zero Hedge http://ift.tt/1Q8QEyK Tyler Durden