The concepts of “smart money” versus “dumb money” refer to the level of investors’ information and experience. Smart money, typically institutional investors and often seasoned professionals, has extensive research and is more adept at data analysis. Therefore, they tend to have more disciplined strategies and are less impacted by negative behavioral traits.
Conversely, dumb money, or non-professional investors, is often characterized by emotional decisions and trend/momentum-chasing. Historically, smart money tends to outperform dumb money. However, there are market periods like early 2021 when retail trading on platforms like WallStreetBets outmaneuvered hedge funds.
As shown below, smart money (institutions and hedge funds) is aggressively selling this market while individual investors, aka dumb money, are aggressively buying. The difference in opinions is stunning. Hedge funds and institutions are both at or near records for negative stock market outflows, representing extreme bearishness. Conversely, individuals have been buying the dip at the highest rate since 2008. Who will be right this time?
What To Watch Today
Earnings
- No notable earnings releases today
Economy
Market Trading Update
As noted yesterday, we continue to trace out the 2022 market, so far anyway, which begs the question whether the next leg down for the market is about to begin, or if the correction is over. It’s a great question with a tough answer. Yesterday, the market rallied sharply on news of a trade deal with the UK. In reality, we have a trade surplus with the UK, which means we should have had a tariff on them.
However, that meant that a trade deal was far easier to reach than not. Nonetheless, the market took it as good news and rallied sharply toward the 200-DMA.
From the bearish perspective, with the market short-term overbought, a decent amount of overhead resistance in place (the 100 and 200-DMA are close to converging), and economic data exhibiting some weakness, there is a decent risk of a near-term pullback. However, the bullish view is that momentum is improving, along with market breadth, and share buybacks are fully engaged for this month.
Furthermore, the 20 and 50-DMAs support any short-term correction, allowing the bulls to increase equity exposure as needed. There is decent overhead resistance above the market, with support building just below. A breakout to the upside should lead to a significantly higher rally, ending the correction phase. A break below support, and there is also a decent amount of downside risk.
Notably, professional managers are very underweight equities, and the more the market rallies, the more they will be forced to increase exposure. If professional investors become bullish, the markets will likely continue to work higher over the next several months. Of course, that does not preclude 3-5% pullbacks along the way for better entry points to increase exposure.
For the moment, the markets are caught in a bit of “no man’s land.” As such, while I am getting more constructive on the market, given the tight trading range, it will likely pay to be more cautious for now. While traders can play this range currently, investors should wait for a confirmed breakout above resistance to add to long exposures aggressively. While you won’t have bought the bottom, there will still be plenty of upside to gain with much less risk to your capital.
Employment Is Not As Good As Powell Alludes
In his post-, Jerome Powell alluded that the labor market was in good shape. To wit:
“April nonfarm payrolls report showed that hiring continued at a solid pace, with the economy adding a better-than-expected 177,000 jobs for the month.”
April job growth was 177k, but he failed to mention that prior months had been revised down sharply. Consequently, job growth is positive but weakening from last year’s pace.
The table below, courtesy of the BLS, tracks revisions to the monthly BLS . After the first two columns, the month and year, is the original number of payroll gains. The following two columns show the ensuing monthly revisions. As shown, job growth has been lowered by 124k (-32k,-49k, and -43k).
The second table below summarizes the original data and revisions for this year and the prior two years to help contextualize employment trends and the size of revisions.
As it shows, the trend (using revised data) has been lower over the two-plus-year period, with more pronounced deterioration this year. Moreover, the average monthly revision has been worse this year than in 2023 and 2024. Typically, employment data revisions are most significant in the periods surrounding economic slowdowns and recessions. Thus, might data revisions indicate that employment is not as robust as Powell suggests?