As I write this, once again a sense of impending doom is settling over the stock market as the recent breakout rally falters. I can hear the bears saying, “Now that the market has brought in all this new money, it’s really set up to fall.” Is there smart money in DJIA Futures? Yes? No?
Let’s take a look.
A chart I’ve shared many times before is the SSI chart on the S&P 500. The broad stock market has risen relentlessly since March of this year, triggering an SSI entry in April and then getting the Brexit driven extra energy it needed to breakout to new highs.
The Brexit boost was needed to finally breakthrough the massive overhead resistance that I’ve been showing all year long via the volume-at-price (VAP) chart on the S&P 500:
The breakout, having been decisively established, is now being tested by a two week rolling top and a drop of about 1%. What’s astonishing is the sense of fear and foreboding that has manifested from such a miniscule pause in the market’s climb.
It’s said that markets climb a wall of worry. It’s clear that there is plenty of worry left in this market to fuel a further climb.
I always make it a point to pay attention to what the “smart money” is doing. I track the smart money primarily by looking at the commercial hedging data from the futures markets (aka the commitment of traders data published by the Chicago Board of Trade).
Where I differ a bit from other students of this important data set is that I don’t assume that the smart money is always right. For example, back in April of this year I shared with you the chart below (since updated) showing a huge drop in the position of the S&P 500 commercial hedgers.
Counter-intuitively I predicted that that this huge shift to negative sentiment by the “smart money” often led to higher prices to come instead of lower prices. I showed, via careful study of 30 years of historical data, that the S&P 500 was higher 7 out of 8 times following such moves and that the average six-month gain was +4.5%.
As of right now, 4 months into this current move, the S&P 500 is up … 4.4%. We’ve still got two months to go.
Part of the current “fear” narrative is being driven by the fact that the Dow Jones Industrial Average has just ended an 8-day losing streak. That hasn’t happened in a long time and the financial media is making a big deal out of it.
Again, when you look at it on a chart, you can see that that the sum total of this “8-day losing streak” is a correction of about 1%.
Talk about making a mountain out of a molehill.
Yes, we could see more downside in the stock market over the next couple of weeks but the path of least resistance is definitely higher.
As a final piece of evidence to support this thesis, take a look at the “smart money” hedging activity in the DJIA itself.
Part of the subtlety of working with this sentiment data is that the same data set works differently for different markets – particularly for purely financial instruments vs. real commodities.
Currently the smart money in the DJIA futures market is at a bearish extreme not seen in decades. You can see that in the bottom section of the chart below. You can also see in the chart below how, in the past, these extremes have tended to resolve with higher prices – following brief sharp corrections.
Once we see the smart money take their foot off the brakes in the DJIA (and see that bottom black line rise back above the bottom red line) we can expect further upside in the DJIA.
I want to be a stock market bear … but I just can’t find my way into that cave yet.