When you look back on the last three weeks, it really is quite amazing how quickly sentiment towards the market has shifted. In January, absolutely nothing could go wrong as all stocks could do was go up. Now, three weeks removed from the January peak, there’s been a definite shift in tone. While we are far (really far) from panic or bearishness, a fog of unease has definitely set in as investors fret over the Fed, rising interest rates, and inflation.
A look at intraday market performance also shows the shift in tone pretty clearly. The first chart below is an intraday composite of the S&P 500 from the start of the year through 1/26. The chart simply shows the S&P 500’s average performance relative to the prior day’s close at every point in the trading day. It’s basically what the “average” trading day has looked like this year. For the first three weeks and change of the year, investors couldn’t get enough of the stock market. The typical pattern in those first eighteen trading days of the year was a higher open with steady gains throughout the trading day. Barring a slight lull from 10:30 to 11:30 and then from 2:00 to 3:00 (ET), stocks just drifted higher.
The picture of the S&P 500 in the 19 trading days since the peak couldn’t be more different. Rather than gapping up in the morning, the market has typically opened flat to lower and then trended lower all day. Volatility has definitely picked up as well. Whereas the chart above is nice and steady, the chart since the 1/26 peak below could just as well be the output of a cardiac device monitoring someone watching the intraday swings. Where the volatility has really picked up is late in the day when there have been sharp declines to the downside.
From time to time, we discuss the Smart Money Indicator which basically says that while the emotional ‘dumb’ money trades at the open, the more restrained and less emotional ‘smart’ money trades towards the end of the day. If that is the case, the shift in market tone is something bulls really need to focus on. While both the smart and dumb money were buying equities with both fists to kick off the year, since the 1/26 peak, the smart money has been selling. It has only been less than a month, but if the trend of the last few weeks and especially the last few days keeps up, it will be a big red flag from the Smart Money Indicator.