Capitalogix

Across the world, the number of people who say the economic situation in their country is “bad” is climbing

Across the world, the number of people who say the economic situation in their country is “bad” is climbing — despite the much-vaunted recovery we all keep hearing about from politicians.

  

 
via Grant Williams.

The stock market is not the economy, and vice versa ... but when you are interested in one, it doesn't hurt to pay attention to the other.

Smart Money Expects a Short-Term Top, Will the Rally Continue?

Traders are often confronted by mixed signals. 

Personally, when I have to choose between something straightforward or something complex - simple is better.

For example, when large "Smart Money" traders show their directional bias, it often pays to follow in their tracks.

Another technique would be to bet against the smaller retail "Dumb Money" traders (because, historically, they are often wrong at major turning points.

However, if I have to decide between following "Smart Money" or doing the opposite of what "Dumb Money" does ... then in the absence of other information, following Smart Money wins because it is more straightforward and simpler.

Here is an example.

Smart Money - Dumb Money Confidence Index.

The chart, below, compares the bets made by small traders (a.k.a. the "Dumb Money"), to those of large commercial hedgers (a.k.a. the "Smart Money").

In practice, Confidence Index readings rarely get below 30% or above 70% (they usually stay between 40% and 60%). When they move outside of those bands, it's time to pay attention.

Even more noteworthy is when there is a wide confidence spread between the bets made by the Dumb Money and Smart Money traders. This type of sentiment spread only happens a few times a year. We often get substantial reversals when it happens.

Consequently, you might want to note this chart from SentimentTrader. It shows that the confidence spread is at extreme levels.

 

Conventional trading wisdom says that Crowds are usually wrong at turning-points.  That doesn't mean they are wrong all the time (yet, as discussed, it makes sense to notice when the Smart Money clearly disagrees). So, after such a strong rally, this is the kind of data that causes me to pay closer attention.

Could this be  a trend-break?  Will Smart Money start actively making Bearish bets?

Price is the primary indicator, and until it breaks down, expect that dips will be met with buying.

Does the Market's Complacency and Low Volatility Scare You?

The S&P 500 has been hitting highs in a rally that's had only modest sell-offs.

Here is a chart from BusinessInsider illustating Societe Generale's Andrew Lapthorne's research.

 

 

Lapthorne notes: "The number of 1% down days for the S&P 500 in any given year has averaged 27 since 1969; the S&P 500 has seen just 16 1% down days over the last 12 months. It has now been [almost 500] days since a market correction of 10% or more, the fourth longest period on record, and, as we show below, the annualized peak to trough loss has only been 5% compared to typical annual draw-down of 15%."

As you can see, recently, volatility has been dramatically below normal.

Here Are Some Links For Your Weekend Reading

Everything in this 1991 RadioShack ad now exists in a single smartphone ... Tough Business!

 

 

Here are some of the posts that caught my eye. Hope you find something interesting.

 

Lighter Links:

• Steve Blank on the Next 50 Years of Business Innovation. (Inc.)
• The First Cellphone Went on Sale 30 Years Ago for $4,000. (Mashable)
• 11 Product Names That Mean Unfortunate Things in Other Languages. (MentalFloss)
• What Happens to Our Brains When We Have Stage Fright? (Buffer)
• How Long Can You Live Without Food or Water? Real-life Barbie, Valeria Lukyanova, has decided she's going to try it. (Examiner)

 

Trading Links:

• Peculiar Traits of Rich People. (Fool)
• Family Offices Chasing Wealthy’s $46 Trillion in Assets. (Bloomberg)
• You Can’t Avoid Asset Allocation … Even If You Try. (CapitalSpectator)
• Forget Passive vs. Active -- Here's How To Evaluate Any Investment Strategy. (Millennial)
• The Average Stock Is More Expensive Now Than It Was At The Peak Of The Dot-Com Bubble In 2000. (BusinessInsider)

Turning a Profit: See How Quickly Tech Giants Build Wealth

Do you want to know how much Apple earns in a minute? What about Twitter or Google?

Here is an interactive graphic that highlights how quickly these businesses are making money.

 

Click image to open interactive version (via WorldPay Zinc). 

 

The results are surprising.  Here is an example showing how much revenue and profit these tech giants make per minute.

 

 

Here's a Look Into How the Average U.S. Consumer Spends Their Money

Where does the money go?  This chart breaks it down.

 

via Daily Infographic.

 

Interesting to look at "average" spending patterns.

Related articles

Mark Zuckerberg vs. an Average 30-Year-Old Man

How Much Stuff Do We Have on Average?

Here Are Some Links to Start Your Weekend

In my opinion, facts are not beliefs or opinions.

 

 

Here are some of the posts that caught my eye. Hope you find something interesting.

 

Lighter Links:

• 10 Famous Geniuses With Truly Weird Secret Habits. (Listverse)
• The Reflex of Character. (Michael Hyatt)
• 10 Jobs That No Longer Exist. (BoredPanda)
• 13 Things You Didn’t Know You Could Do On Spotify. (JeoBox)
• 5 Social Media Metrics that your Business Should Track. (TheNextWeb)

 

Trading Links:

• Hedge Funds Have Worst Start Since 2008. (BusinessInsider)
• Will Last Year's Winners Be This Year's Losers? (BlackRock)
• On A 'Rigged' Wall Street, Milliseconds Make All The Difference. (NPR)
• CME Trading Outage Showed That Man Can Still Match The Machine. (Reuters)
• Biggest Credit Bubble in History Flashes Warning – ‘Seek Cover’. (NakedCapitalism)

Don't Get So Comfortable Having Fun That You Forget About Risk Control

I spent part of the week in Miami.  While there, I had a great time talking about deals, opportunities, and how so many hedge fund pros are setting-up shop there.

 

 

Opportunity can be distracting.

Let's play a guessing game.  Who has two thumbs and forgot to wear sunscreen?

 

 

Meanwhile, the Markets have held up well.  The Dow Jones Industrial Average is trading near its highs.

 

 

However, the Russell 2000 Index is showing that traders are taking a risk-off approach to the smaller cap issues.

 

 

Investors have clearly had a preference for larger-cap stocks over smaller-cap ones for the past two months.

This type of Small-Cap negative divergence has been market-negative historically.  

Put that with the "Sell in May and Go Away" theory ... and what you have is another caution light (and a potential early indicator to watch for when the small caps start to out-perform the big caps again).

Should You Sell in May and Go Away? Seasonality Suggests That's Not Such a Bad Idea

Is it safe to get back in the Market?

 

According to popular trading rules, May 1st marks the beginning of a 6-month period of unfavorable seasonality. This is often referred to as "Sell-In-May-and-Go-Away".

 

Research published by Yale Hirsch in the Trader's Almanac shows that the market year is often broken into two six-month seasonality periods.

 

• From May 1 through October 31 seasonality is unfavorable, and the market most often finishes lower than it was at the beginning of the period.
• The period from November 1 through April 30 is seasonally favorable, and the market most often finishes the period higher.

 

Here is a recent chart showing the returns, for the past 20 years, of this Halloween through April bullish seasonality idea.

 

 

 

Superficially, it seems to work.

 

While the statistical average results for these two periods are quite compelling, trying to ride the market in real-time in hopes of capturing these results is not always as easy as it sounds.

 

Assume that bull and bear market pressures tend to override seasonal tendencies. 

 

In addition, it's also pretty safe to assume that there are no guarantees in trading.  That means that every year is different and presents its own challenges.

 

As we approach May, traders get wary.  That doesn't mean they sell.  Instead, they acknowledge that, historically,  a volatile, sideways-moving market is likely ... and they prepare accordingly.

 

Nonetheless, price is your primary indicator and it makes sense to follow the primary trend.

 

Related articles

Favorable 6 Month Seasonality Period Begins

Should You Sell in May and Go Away?

Jeffrey Hirsch Reveals Stock Trader's Almanac's View

What Level of Market Correction Is Normal Historically? [Chart]

There's always some pain to endure.

This chart shows S&P 500 intra-year declines compared with calendar year returns. The bars represent year-end returns since 1980, while the purple dots mark each year's market low.

Buy and Hold investors must stomach significant drawdowns to get their returns — even in 'good' years.

 

via JP Morgan Funds.

 

Basically, you have to understand that 10-15% pull-backs are normal (perhaps even healthy) for the market.

According to Business Insider, here are market correction averages and their historic frequency. Since 1900, we've seen:

• 5% market corrections: 3x per year.
• 10% market corrections: Once per year.
• 20% market corrections: Once every 3.5 years..

Interesting.