Earnings season is upon us and the market is flexing its muscles in response to dramatically higher profits. Analysts are anticipating a nearly 20 per cent year-over-year profit gain among S&P 500 companies, thanks in large part to corporate tax reductions. Even though the market stumbled in Q1/2018, most technical readings remain intact. Despite two big downdrafts earlier in the year, the S&P 500 held above its 200-day moving average. Roughly half of the NYSE Composite Index constituents are trading above their 200-day moving averages; that’s down from 70 per cent at the beginning of the year.

However, lurking among our technical indicators is one metric that is painting a dramatically dour picture. Better characterized a spice rather than a key ingredient in the outlook mix, the Smart Money Index (SMI) takes the first half hour of trading, which is dominated by retail investors (“dumb money”), reverses its sign and adds it to the last half hour of trading, which is typically dominated by institutional investors (“smart money”). SMI has been a good predictor of market turns.

The Smart Money Index turned downward as early as June 2008, long before the September market swoon, and bottomed in October of that year, five months before the S&P rebounded. After reaching an all-time high in tandem with most equity markets at the beginning of 2018, the SMI has plunged more than 18 per cent since then, far more than the S&P’s 7 per cent retreat.  Is Smart Money suggesting more pain in our future?  For now, we’ll continue to watch Smart Money in combinations with our other more established metrics.

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