Afternoon money suggests bullish setup

There is a theory within technical analysis that says dumb  money moves in the morning, while smart money moves in the afternoon. Some technical studies narrow the movements down to the first hour of the day vs. last hour of the day. The logic of the theory lies in the belief that retail “dumb money” tends to react to the news or to what happened yesterday, and can “melt up” or “melt down” the market in that first part of the day by their panic/ecstatic moves. Meanwhile, smart money sits on the sidelines calmly watching the trading – and enters into the fray to try to take advantage of this emotional buying or selling by  cheerily giving the crowd what it wants (i.e. selling into the irrational exuberance, or buying off of panicked weaker hands).

If you follow “Smart Money/ Dumb Money” studies–you want to follow the smart money and fade the dumb money. To some degree, I respect the theory of afternoon money being “smart”, but it does not influence me too much to trade in the direction of the afternoon movements. That’s because way back in the late 1990’s—I had to write a thesis in order to earn my CMT designation. These days you can get away with writing 3 separate exams to get the designation, but back then it was 2 exams and a thesis—no third exam.

As a student of sentiment studies, I decided to try to prove or disprove the validity of this afternoon money concept. Back then there wasn’t a lot of stock data available on the internet. So I went to the Toronto Public Library and spent hours looking through the Wall Street Journal newspapers on microfiche, which back then had hourly data on the DJIA. I recorded the first/last hour of trading over a fairly long period of time—about 10 years of daily data I believe it was. It took a looooong time to do the recording off of that microfiche!  I then formulated a study to compare the two time periods  of movements. After all of that painstaking data gathering and number crunching—the conclusion I came to was that the first/last hour study was random in predictive power. In other words, it’s a theory that seems logical, but – at least back then—didn’t actually work to help you predict market movements. However, new research by Sentimentrader.com suggests it may have some predictive power – but only if you focus on afternoon money.

The chart below compares the last hour movements of the markets since 2018. The blue line is the cumulative last-hour movements on the SPX over that period. It does appear that afternoon money coming off of a net-negative low period tends to become a leading indicator when afternoons become predominantly bullish.

 

Sentimentrader.com found that when the last-hour indicator increases for seven consecutive sessions, “the S&P 500 rallied consistently across all time frames with solid win rates and z-scores”. A month later, the index was higher 82% of the time and recorded 17 consecutive profitable signals between 2006 and 2019.

Here’s a 60-minute chart of the most recent seven days, including Monday. I’ve circled the afternoon hours each day. You can see that, even when the market opened negatively, its been picking up in the afternoon. Good times a-comin’?

So, if Sentimentrader’s study holds true, this is one point for the bulls. Personally, I’ll believe it when I see SPX break decisively (and I mean decisively!) above 4100 for at least a couple of weeks. Lets see if this afternoon strength tendency follows through this time, with some bullish setup on the charts to back it up…

 

New video coming out on oil

Last week I recorded a video outlining some of the factors I’ve been watching regarding the oil trade. That video will be released on Friday. Meanwhile, here is a chart that I didn’t cover in the video suggesting that Crude Oil futures (longs vs shorts) suggest oversold (too many shorts) conditions. Watch for my video this Friday for more data on the trade.

 

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2 Comments

  • Interesting research

    As stated in other works, such as Time in, Time out, “Sell in May, Then Go Away” because as per historical data, weak periods of the stock markets, of 1960’s and 70’s peaked in May, then it was downhill, contrary to stronger decades, that saw a peak in July.

    Assuming 2023, is similar to the Jimmy Carter presidential era, of the late 70’s, with Paul A Volker at the time, trying to slow down the inflation rate, as the Fed and the Bank of Canada, are trying to do now, it may be downhill beginning end of May, coming up, in mere weeks, for months on end.

    Reply
    • Mike, you took the words right outta my mouth. Yes, certainly a potential!

      Reply

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