Now, the smart money is finally piling into some of the out-of-favor sectors from last year … stocks and sectors that I have favored since late 2013, expecting just such a reversal of fortune. Or as the astute Michael Santoli recently wrote: “The dominant themes of the sharp pullback have been a reversal of the winning investment trades of 2013 (which got very crowded and expensive).”
Case in point: Mining stocks. You can’t find a more maligned group during 2013 than precious metal stocks. The Philadelphia Gold and Silver Sector Index (XAU) of mining shares plunged 48 percent in 2013, but what a difference a few months can make. Mining stocks are up 7 percent year-to-date, even after the recent pullback in the gold price, and at the peak in mid-March XAU was up 20 percent.
In fact, commodities in general have provided positive performance for investors so far this year. In a big trend reversal from recent years, the Continuous Commodity Futures Price Index (CCI), an equal-weighted average of commodity prices, has gained 11 percent year to date. Beneath the surface, several markets are performing even better.
Besides an 8.3 percent gain in gold … natural gas is up 9 percent, corn has popped 18 percent, palladium is up 10.8 percent … and coffee is up a stunning 82.6 percent!
This rotation out of last year’s best-performing stocks and sectors has been swift, and it’s clear that hair-trigger institutional investors are behind the move. I have noticed a consistent pattern in recent weeks for stocks to trade higher in the morning only to fall victim to an afternoon swoon.
That’s a sure sign of “smart money” selling at work just prior to the close. The Smart Money Flow Index (SMFI) (see graph below) subtracts the first half-hour of emotionally driven buying and selling from the Dow and places more focus on the last hour of trading.
This is based on the theory that the first 30 minutes of trading is dominated by market orders from retail investors or index-tracking funds. Meanwhile, the “smart money” waits until the end of the day to make their move into, or out of, stocks in a big way.
According to Bloomberg data, the Smart Money Flow Index has plunged 8.8 percent since the beginning of March, while the Dow itself has declined just 2 percent. This means the stock market’s heavy-hitters have been eager sellers into the close.