This is an abridged version of our Daily Report.

Smart money keeps selling

The Smart Money Flow Index is not improving, as late-day sellers continue to show up. Assuming that means large, “smart” money managers are getting out (an iffy conclusion), it’s a warning sign.

The only time in 35 years it was this bad with stocks so near a high was in 2000.

Backup in yields has hurt stocks

Bond yields have risen substantially in the past three weeks and are near a multi-year high. That has caused trouble for stocks in the past, with the S&P struggling over the next two months. Bond yields themselves have usually continued to rise.

Staples aren’t very stable

The Optimism Index on XLP fell below 8 due to Thursday’s large loss, and the fund is not looking good.

Rate troubles

Perhaps due to concerns about rising rates, investors yanked money from rate-sensitive funds heading into Thursday. ETF outflows were dominated by Financials (XLF) and bond funds (LQD, HYG, and JNK).

This is an abridged version of our Daily Report.

Cancelling the Dow Theory sell signal

After the Dow Industrials and Transports fell into a Dow Theory sell signal, Transports have caught fire. They just hit a 50-day high, which technically doesn’t cancel a sell signal but it might as well.

Forward returns in both indexes were very good when one of them rebounded so much so quickly after a sell signal.

A low volume rebound

As the rally in stocks progresses, volume has been tepid compared to when stocks were dropping.

That’s typical for how declines and rebounds work, and not a sign of a “low grade” rally. Future returns were about equal after high-volume rallies vs low-volume ones.

Negative pattern

Major index funds like SPY and IWM carved out a short-term negative pattern on Wednesday by gapping up then weakening while forming a tight intraday range.

Oil risk rises

The risk level for crude oil has hit 8 again, an area that suggests high risk. According to the Backtest Engine, when the reading was 8 or higher, over the next month, oil rallied 42% of the time.

This is an abridged version of our Daily Report.

Indexes reclaim technical levels

According to media reports, Tuesday’s jump in the Dow and S&P above their 50-day averages was important. The Dow does tend to have markedly better annualized returns when trading above its average.

But as an all-clear signal after a correction, regaining the 50-day average was a poor predictor.

Back to (the new) normal

Volatility indexes are returning to the low levels they had been at prior to the volatility spikes. For the “old” VIX index, it is back below 15 for the first time in a month while suffering a volatility spike.

It has tended to jump again in the short-term and was not a good all-clear sign.

A positive lead

The S&P 500 is still more than 5% below its 52-week high. At the same time, its Cumulative Advance/Decline Line has just closed at a new record high. That seems like a good sign, but it has been a false positive and unreliable as a leading indicator.

Sugar is hated again

Sugar has overtaken the most-hated commodity crown again, with an Optimism Index that has dropped below 20, ranking among the lowest readings since 1991.

This is an abridged version of our Daily Report.

Two weeks and still no thrust

Stocks have been rallying for a couple of weeks, but there hasn’t yet been a 90% Up Volume day.

Forward returns when there has been a 90% day in the first two weeks were excellent, not so much when not. That is a minor negative for our current signal.

Big money is pulling back

The Barron’s poll of big money managers shows a pullback in optimism despite the (volatile) rally in stocks. The Bull Ratio is about average for the past 19 years. Among sectors, they favor Financials, and Energy while avoiding Utilities to a record degree.

Volatility drop

The Optimism Index on the VXX fund is now below 15 for only the 3rd time in the past year. For a fund that almost always declines, that’s a low reading.

Energy is sizzling

The Energy sector has the most 52-week highs of any other, nearing 20% of stocks in the S&P 500 Energy Sector.

This is an abridged version of our Daily Report.

“Bearish” engulfing

The price pattern in the S&P does not look promising, according to textbook technical analysis. Friday arguably was a bearish engulfing pattern that suggests weak buying interest and eager sellers.

It has not been a successful reason to sell, with stocks rising over the next two weeks essentially every time.).

Dollar apathy

Investors have fled mutual and exchange-traded funds that bet on, or hedge against, a rising dollar. Assets in the funds are trading at or near a 7-year low. Traders have also fled currency-hedged ETFs that bet on the performance of other countries while hedging against a rise in the buck.

Big bank bust

Among the most positive knee-jerk reactions to earnings was JP Morgan, which gapped up above its prior high and looked ready to challenge its 52-week high.

The latest Commitments of Traders report was released, covering positions through Tuesday.

Most contracts saw “smart money” hedgers reducing previous extremes. The 3-year Max/Min Screen shows a new 3-year extreme in hedgers’ short exposure in the British pound and VIX futures.

This is an abridged version of our Daily Report.

Ebbing optimism

Newsletter writers have continued to pull back their stock market expectations. The Investor’s Intelligence Bull Ratio is now below 70% for the first time in more than six months.

Other times a long streak of optimism ended, stocks showed subpar returns, until either optimism returned or declined enough to be neutral at most.

Every day an emotional swing

For the past 8 days, S&P 500 futures have opened far from where they closed the prior day. That’s one of the longest streaks of emotional opening volatility since 1982.

Short-term returns were negative after other streaks, but long-term returns were very good.

Dollar doldrums

Two years ago, there was more than $250 million invested in the Rydex Strong Dollar mutual fund. Now it’s down to a lowly $7.9 million, a decline of 97%.

This is an abridged version of our Daily Report.

An undervalued market

Stocks are undervalued, at least according to Wall Street strategists. They expect the S&P 500 to end the year more than 10% above where it is, enough to suggest they think the index is undervalued.

When they’ve been so adamant about a higher market since 1999, it has usually accommodated. At the same time, Wall Street analysts have been busy lowering price estimates on the stocks they cover, with a net 150 downgrades during the past week, one of the highest amounts in 7 years.

Cash beats (almost) all

There have been few Fidelity Select sector mutual funds that have beat the return on cash lately. Fewer than 10% of them have had a better return, an abnormally low number, especially in a bull market. According to the Backtest Engine, that has led to a positive 6-month return after 433 of 462 days.

Energy breaks out

The energy sector finally broke out of a long trading range. The width between its Bollinger Bands (a measure of price volatility) has been suppressed but on Tuesday the sector broke well above its upper Band. The S&P 500 Energy sector has done this 24 other times since 1990.

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Yet another large gap down this morning as traders grapple with what seem like potential game-changers in terms of geopolitics. For the S&P 500 futures, this will mark the 6th time in 7 days that futures have opened at least 0.5% away from the prior close. We saw that kind of emotional volati

This is an abridged version of our Daily Report.

Smart money collapse

Monday nearly saw a 20-year record decline in the Smart Money Index that compares first hour vs last hour trading. The past 30 days has consistent seen selling in the SMI, suggesting dumb money buying and smart money selling.

It’s not quite that easy, and it’s possible that what we’re seeing is overall exhaustive selling pressure.

A long correction

During bull markets, corrections don’t often last longer than 50 days, especially when the correction was large. The last two times a bull market correction hit 50 days and more than -10% were in 2000 and 2007. Historically, the next couple of months were strongly positive but not so much after that.

Bucking the euro

Economic surprises in the U.S. have been much stronger versus the eurozone. Perhaps because of that, smart money hedgers in the futures market are betting on a dollar rebound.

Similar setups were only marginally positive for the dollar but were exceedingly so for gold and oil.

Quite the reversal

The S&P 500 rallied more than 1.5% intraday but ended up opening and closing in the bottom 20% of its intraday range, a round-trip. With a rising 200-day average, that has happened only 10 times since 1982.

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This is an abridged version of our Daily Report.

All or nothing

In the past 11 sessions, there have been 8 all-or-nothing days, when Up Volume was above 80% or below 20%.

Even bear markets rarely see this level of uncertainty. Forward returns had a strong tendency to be positive, especially over the next two months (see inside).

Not a good time for financials

Every stock in the S&P 500 Financial Sector declined on Friday. That’s the 3rd time in the past 3 weeks that every financial stock declined. There have been four other periods of comparable wholesale selling, all leading to shorter-term rallies (see inside).

Dow(n) stocks

Being included in a Dow index is a badge of honor, but on Friday not so much. Every member of the three major Dow indexes declined on Friday (Industrials, Utilities, and Transports).

That’s the 4th time in three years, all leading to rallies, which was the case most times in the past 20 years (see inside).

The latest Commitments of Traders report was released, covering positions through Tuesday.

“Smart money” hedgers added to record long exposure in silver and sugar.

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