Smart Money
The rally in many of the asset class markets – Aussie Notes & Blue Chip stocks to name two of the bigger ones –during the 2nd and 3rd weeks of this month reminded us of the importance of fundamentals — specifically yield — and also served to take away a good part of that always dwindling kitty of “dumb money”. This past Thursday and Friday we were again reminded of the power of yield as we saw a mini-repeat of what happened at the begining of this month as the lure of short AUDUSD and ESH positions once again proved to be a bug-light for dumb money.
There is no doubt that “hot money” is cooling and “fast money” is slowing. There is a direct relationship between disposable income and speculative flows, and brother, the disposable income business ain’t exactly booming. Which may be a good thing for the more liquid asset classes. Five years ago easy money was going from lenders (big businesses and banks) to borrowers (the public) and from there into all kinds of ill advised avenues — think real-estate following a 20 year bull market and the carry-trade at the tail-end of a 5-year run. Today easy money is going from lenders (governments) to borrowers (big businesses and banks).
The driving force in the markets now — the only force in many regards –is retirement money, which tends to be “smart money” because the bulk of it is managed through plans such as pensions and 401K’s. Though this money operates in the same fields of fire as the rest of us, it’s not however speculative money. When hedge funds that manage pension money start lifting shorts in EURUSD or taking profit in long USDCHF positons it may not be because they are bullish on the ECB or bearish on the Greenback; it may be because they were ordered to do so in order to raise equity to hedge investment grade markets such as bluechip stocks and or Aussie bonds. And this action may not be because said pension funds are now bearish on those investments as much as they are just being prudent by collaring thier upside gains for now by taking away the downside risk. Big money doesn’t enjoy the luxury of being as nimble as the rest of us pikers. They can’t flatten out and go into cash ahead of the weekend.
The lesson learned IMHO over the past month or so is that retail traders need to be able to take advantage of the scalability in position sizing and trading time frames that markets provide. If we can define direction and identify fact based triggers on one time frame, then by nature of fractal geometry we can replicate the process on a smaller time frame and adjust for the increased speed in our decision making.
These AUDUSD charts give us an idea of what I mean. In the top panel is the AUDUSD daily chart while in the lower panel we have the same market’s 240 minute chart. We can see on the 240 minute chart how price climbs above that significant daily line — in yellow — on Thursday to change direction and lift the leading indicator higher, giving us a fact based buy trigger on the lower time frame chart that night, well before a sharp rally sweeps weak shorts out of the market the following morning.
To learn more about fact based triggers, and attend a live, free one on one tutorial given by Jay this Tuesday where he explains an important component in determining market direction, e-mail him at jnorris@brewerinvestmentgroup.com or call 800-971-2154.
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