Smart Money vs Dumb Money Explained

We are going to dive deep into the concept of smart money vs dumb money.

What is Smart Money vs Dumb Money With Charts & Graphs

In the following charts and graphs we discuss how to use the Smart Money vs Dumb Money indicator to see why stocks are headed lower in the interim but also why we’re getting closer to a major bottom. We talk about why the recession talk is overblown. I then cover some interesting energy charts, sector fund flows, and a discounted uber-leveraged retailer that comes with a lot of hair but might be worth a second look, plus more…

Summary of BofA’s most recent Flow Show report

Getting close to another B&B Buy Signal. 

The flush out we’re about to see should do the trick…

A-D Line for High Yield

@vixologist, who’s a great follow on the twitters, shared this chart last week showing the A-D Line for High Yield. Any BBG users know if this can be created within the terminal? I like checking in on this one as it’s a useful lead but guessing I’ll probably have to pull the data myself into excel.

Narrative Pendulum

The Narrative Pendulum sure swings fast nowadays as recession chatter is quickly becoming a dominant narrative. But as I wrote in a Note last week for our Collective, these fears are overblown for a number of reasons. One is the lack of financial imbalances.

GS writes “Consumption and investment booms are often associated with declining or negative financial balances — for example, the IT and CAPEX bubble in the late 1990s and the housing bubble in the mid-2000s. In both cases, the private sector was spending beyond its means, with consumption and investment uns

US Issuers and High Yield Debt 

Here’s more from GS “Digging deeper into the riskier segments of the corporate sector, we find that highly levered firms are also in a strong financial position in the aggregate, with a financial surplus… Refinancing risk and vulnerability to higher interest rates is also low in the medium-term because most high-yield issuers already refinanced at favorable rates (only 4% of their bonds and loans mature in 2022-2023). h/t to @modestproposal1 for the charts.

SentimenTrader’s Dumb Money Confidence Indicator

SentimenTrader’s Dumb Money Confidence Indicator is hitting extremes. Following past readings, the market ends up an average of 6.36% 2-months later, 92% of the time. These are pretty good odds.

Now, a LOT can happen between now and then, and the dip down before the rip higher is likely to be a doozy. But since we’re not going into a recession, there will be a time to buy within the next few weeks. It’ll be when sentiment and the narrative are really bad.

The time to buy will be when you won’t want to, to paraphrase the OG Walter Deemer.

Global Energy Outlook & Money Printing

JPM published a great report on the global energy outlook the other week. Below are a few of the charts. US Oil & Gas companies are printing money and thanks to regulations, investor enforced discipline, and the echo of the last oil bust, they’ll continue to do so for the next few years to come.

I updated our bullish outlook on the energy space last month (link here). The sector has come a long way, outperforming by a wide mile this year. But we’re still in the early innings of this game and there’s still a looong ways to go.

Speed of Disruption

Renewables aren’t showing the typical s-curve growth of adoption seen in other disruptive technologies. Perhaps that’s because this is the first time in human history where we’re trying to force a move backwards to a significantly lower power density source.

The pipedream of living in a purely renewable world will only become more and more apparent as all the tier 1 locations for wind and solar get built out and we see efficiency rates decline significantly as sub-tier 2 and below locales get built.

Fund Flows For Tech, Real Estate, Communications and More

Some interesting data points in the sector flows from our Sector tab in our HUD. Was not expecting this but technology (XLK) fund flows hit their 100th 3-year percentile recently, while energy (XLE) hit the zero percentile. Quite a head-scratcher this is….

WTI Crude Oil

I’ve been periodically pointing this out but here I go again. Speculative positioning in crude remains very low and is showing no signs of reversing. It also looks like a full Western embargo on Russian oil is in the works, which is umm… not bearish (read this BBG piece here).

PRTY US Equity

Yet Another Value Blog put out a good write-up on PRTY the other week (link here).

The TL;DR is that PRTY is a specialty retailer in an “un-amazonable” category that’s trading for cheap; PRTY did $266m in EBITDA last year and their current market cap is $344m. Another critical part of the bull and bear thesis is that PRTY has a very levered balance sheet, their EV is over 1.7B. Financial leverage is like nitrous oxide. It can accelerate a stock’s rerating or nose it straight into the ground.

I haven’t done any DD on them but plan to. We have a couple buddies who run retail-focused funds that are bulled up on the company. The chart is dog crap so don’t need to rush on this one as it’s hopefully headed lower in the near term.

Thanks for reading.

Stay frosty and keep your head on a swivel.

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Brandon Beylo

Value Investor

Brandon has been a professional investor focusing on value for over 13 years, spending his time in small to micro-cap companies, spin-offs, SPACs, and deep value liquidation situations. Over time, he’s developed a deeper understanding for what deep-value investing actually means, and refined his philosophy to include any business trading at a wild discount to what he thinks its worth in 3-5 years.

Brandon has a tenacious passion for investing, broad-based learning, and business. He previously worked for several leading investment firms before joining the team at Macro Ops. He lives by the famous Munger mantra of trying to get a little smarter each day.


Investing & Personal Finance

AK is the founder of Macro Ops and the host of Fallible.

He started out in corporate economics for a Fortune 50 company before moving to a long/short equity investment firm.

With Macro Ops focused primarily on institutional clients, AK moved to servicing new investors just starting their journey. He takes the professional research and education produced at Macro Ops and breaks it down for beginners. The goal is to help clients find the best solution for their investing needs through effective education.

Tyler Kling

Volatility & Options Trader

Former trade desk manager at $100+ million family office where he oversaw multiple traders and helped develop cutting edge quantitative strategies in the derivatives market.

He worked as a consultant to the family office’s in-house fund of funds in the areas of portfolio manager evaluation and capital allocation.

Certified in Quantitative Finance from the Fitch Learning Center in London, England where he studied under famous quants such as Paul Wilmott.

Alex Barrow

Macro Trader

Founder and head macro trader at Macro Ops. Alex joined the US Marine Corps on his 18th birthday just one month after the 9/11 terrorist attacks. He subsequently spent a decade in the military. Serving in various capacities from scout sniper to interrogator and counterintelligence specialist. Following his military service, he worked as a contract intelligence professional for a number of US agencies (from the DIA to FBI) with a focus on counterintelligence and terrorist financing. He also spent time consulting for a tech company that specialized in building analytic software for finance and intelligence analysis.

After leaving the field of intelligence he went to work at a global macro hedge fund. He’s been professionally involved in markets since 2005, has consulted with a number of the leading names in the hedge fund space, and now manages his own family office while running Macro Ops. He’s published over 300 white papers on complex financial and macroeconomic topics, writes regularly about investment/market trends, and frequently speaks at conferences on trading and investing.

Macro Ops is a market research firm geared toward professional and experienced retail traders and investors. Macro Ops’ research has been featured in Forbes, Marketwatch, Business Insider, and Real Vision as well as a number of other leading publications.

You can find out more about Alex on his LinkedIn account here and also find him on Twitter where he frequently shares his market research.