Negative Divergence on Big Money Index Keeps Going

The S&P 500 recovered all its yesterday's loss, while the Big Money Index only recovered a fraction of that. As a result, the negative divergence between S&P 500 and BMI keeps going. This is a more encouraging sign that the market may have bottomed.

Potential Negative Divergence of Big Money Index - Market May Turn Up

As mentioned before, the Big Money Index is now a lagging indicator, meaning if there is any negative divergence between BMI and S&P 500, the market may follow S&P 500 and it usually marks important turning point of the market. As of today, there is a tiny negative divergence: BMI made a lower low but S&P still held above its most recent lows. If it prevails, S&P 500 will turn here and move up. Anyway, it is still developing. Investors want to pay close attention to it down the road.

Big Money Index Will Be Manually Updated Everyday After Market Close

The Google spreadsheet is not working well recently and dynamic data couldn't be updated for the Big Money Index. I have to change it back to manual mode. Data will be updated everyday after market close. Sorry for the inconvenience.

Big Money Index an Lagging Indicator From Now On?

Lately the Big Money Index behaved more like a lagging indicator. Around late May there was a negative divergence between BMI and S&P 500, but S&P 500 didn't follow BMI to move higher. Instead, BMI followed S&P 500 and move lower. Now there is a negative divergence under development. However it appears that this time S&P 500 will lead again.

BMI was designed to indicate the money flow into or out from the market. And it has been a leading indicator for two years. The recent change could signify that we are now in a different phase of the bull market.

In the past two years when BMI was leading, investors have correctly anticipated the trajectory of the market. But from now on, investors' predictive power is likely diminished, and they may just follow the market up and down. Indeed, in the past two years, the macro economic trend is determined by fiscal and monetary stimulus, which is relatively easier to predict. But from now on, with stimulus being unwound, the effect of other factors started to emerge. The market internals are a lot more complicated and it's thus harder for investors to predict.

I'll keep an eye on this. If there is any negative divergence down the road, I'd like to favor the chance that BMI will follow S&P 500. Still a negative divergence would mark a significant bottom or top of the market.

My Crystal Ball Is Blurry

The Big Money Index made a decisive downdraft today and breached previous significant low seen on May 5th. Technically this confirmed that BMI is now in a down trend. I have been using BMI as a leading indicator for about two years and this is the first time a positive divergence failed. The sharp downdraft indicated that money fled out of the market in a rush and further weakness is expected. But because this time BMI failed to work, I don't want to rush into the bearish conclusion.

So I turned to other charts to gain more clues. The first chart I looked at is TLT. Usually investors flew to Treasury bonds when they tried to avoid risk asset, i.e., the stocks. On the chart TLT formed a technical pattern named "blow-off top". Yesterday it decisively broke to a new high with huge volume, while today it fell back in the same decisive manner and with even higher volume. Usually a blow-off top indicates a key turning point of a trend. It happens when an established trend finally attracted attention of mediocre investors. As they rush in to ride on the trend, the last portion of buying power is exhausted. Smart investors will take the opportunity to offload their positions and the late comers become the unlucky bag holders. They couldn't find anyone else to pay a higher price for their holdings and the price will enter a down trend.

It would be an encouraging signal to stock investors if TLT starts to fall from here. I also took a look at the chart of SPY. On its chart I saw a pattern named "breakout pullback". On May 31st, SPY break out to the upside of a down trend channel. Unfortunately the very next day it fell back into the channel again. This often happens when a down trend has run its course and an up trend is about to establish. Some market participators try to sharply drive down the market to test its determination. In fact a dreadful psychological test happened today when SPY breached its previous low. When a key technical support is breached, weak hands will surrender their positions. A positive sign is that today SPY closed above the support line, meaning it could be only a test. A typical breakout pullback serves to purge out weak hands before the market starts to rally.

If both TLT and SPY point to a bullish outcome, I'd like to disagree with BMI. Nonetheless my most powerful crystal ball is blurry right now, and cautions is highly recommended. But when should an investor be reckless?

Big Money Index at Inflection Point

The Big Money Index is on edge. If it drops below the recent significant low seen in May 5th, technically it forms a lower low and invalidates the up trend. It also invalidates the positive divergence we previously observed, and confirms the down trend of the market.

Big Money Index Drops Sharply

The Big Money Index drops sharply today. Usually this not a good sign as it indicates that money has flowed out of the market massively. Nonetheless the positive divergence is still valid. Cautions is highly recommended. Investors and traders want to monitor BMI closely in near future.

Positive Divergence of BMI

Today the Big Money Index forms a positive divergence with respect to the S & P 500 Index. If history is any guide, the market is expected to move to a new high soon.

BMI: Potential Positive Divergence

The S & P 500 Index falls quickly lately. But my Big Money Index is still pointing up. There might be a positive divergence under development. If history is any guide, the market may repeat its mid-April course. We shall see.

Big Money Index In The Past Two Years

Below is the chart of the Big Money Index vs. S & P 500 in the past two years. Divergences are marked out on the chart.

Change The Big Money Index Back

Sorry I have to change the Big Money Index back. The image version is not stable. It appears to me that the image will only work for a couple of minutes and then the link is broken, which force me to regenerate another image. I think there are some glitches with the image version. Nonetheless, the latest version is interactive. Point your mouse on the lines you will see the date and the index value.

Minor Change to Big Money Index

You may noticed the changes I've made on the Big Money Index. Now it is an image, and you can see the full-sized version when click on it. But it won't automatically refresh itself. You have to refresh the webpage to get it reloaded. The chart is still updated every five minutes, just you need to reload the page to see the update. I've put my name on the image to make sure it won't get stolen that easily.

Big Money Index Added To My Blog

Some of my friends may know about the Big Money Index, an index I composed to gauge the money flow into or out of the equity market. Supposedly the money flow drives the price. So the market, usually represented by the S & P 500 index, will move higher if money flow is positive, and lower if money flow is negative. Most of the time S & P 500 moves along with BMI. Occasionally we may see a divergence, meaning that the money flow is not reflected by the market, yet. Since eventually we expect S & P 500 to follow BMI, such divergence offers good trading opportunities.

I've added BMI to my blog to the lower right corner. Although the chart will be automatically updated every five minutes, you don't have to fix your eyes on it. For one this is mainly for updating S & P 500. For two usually we are looking for a divergence spanning a couple of days.

As of today we see a positive divergence between BMI and S & P 500. So I expect S & P 500 to make new high soon, if BMI still works.