Transcription:
Hey, Dan Murphy here. I've got a special announcement to make today. You might have noticed that we've got this long-term chart of the S&P 500. And these happen to the signals of the Smart Money Indicator.
So without further ado after 13 months, my Smart Money Indicator has flipped to a short, sale short. So I was looking for the market to actually fall. I never know for certainty if the market's going to like a rock over here or it’s going to be whip-sawed around, which it did after two of the best ever signals ever in the history of this indicator.
You see again, we’re always dealing with probabilities, not certainties. If I use that Coke can analogy – most people expect to put your $2.50 into the Coke machine, and in return you actually get a Coke, right? The market doesn't actually work that way. See its terms of probability.
You don't know if you're going to get a loser like over here. You don't know if you’re going to get a choppy market like it did over here. Let me show you other places where it happened over here. Let's say after it sold short it had a big counter move, big counter moves up here.
You see what I'm doing for you right now is tempering your expectations because I don't want you trading in a frenzy. I don't want you thinking that Dan must be a guru therefore the market has to go straight down and we're going to crash into oblivion. No, we're dealing in terms of probability.
There are times where you try to put the money into the machine and you don't get anything back. That's why the almost certainty, unless the damn machine is broken, the certainty is gone. We’re trading. You have to have a definite mental image of how you make money in this market. So we have to think in terms of probability.
It's funny, it's ironic that I was just talking to clients about this yesterday, and again my membership is completely closed, so please don't ask about it. I was giving a fishing analogy - my good old Grandpa George, my fondest memories of him are fishing. He would always say that in order to catch a fish you've got to throw your bait in the water.
It's the same thing with trading. You don't know if you're going to come up empty on these trades, if you're going to come up with a loss. All you have to keep on doing though is throw in that bait in the water and eventually you're going to get a big whopper on the line.
That’s exactly what the Smart Money Indicator has done. Because I think the Smart Money Indicator is my greatest system ever. I know it's a long term timing model and everything, but still at the heart of it gets right down to the heart to how trading works, and that there’s smart people and that there's dumb people. You need to fade the dumb people, trade with the smart people.
I can't tell you all my recipes but that's essentially, what my Smart Money Indicator does. That's the reason why unequivocally I'm going short now. I'm only looking for opportunities on the short side when it comes to trading the S&P 500 for more than a couple of days at a time.
If I'm sailing I want the wind to my back. We don't want to piss in the wind here. Let's go ahead and I'll just show you now, now that I've hopefully I’ve tempered your expectations, let's go ahead and look at how to profit from a falling S&P 500.
Now a lot of you might be tempted to use the leverage ETF's like SDS. I find that fine for a day trader or swing trading, but eventually so far the Smart Money Indicator hasn't been... If you use the Smart Money Indicator for these signals, using SDS or SSO hasn't really been a big deal. In the future I think there could be a problem just because these funds are rebalanced daily.
Therefore, I recommend a non-leverage funds, SH. SH is going to go up when the S&P 500 goes down. The other way you could use it of course to profit from a sale short signal would be to sale short S&P 500 contracts. You could sale short SPY, but unfortunately you have to pay margin rates on that. I wouldn’t want you to have to do that.
Not very keen on really using options either on these long time timing models. Options should be suited more for short term trading which is a whole different ball game. That's something that I talk about with members and so forth with swing trades. Don’t really want to get into that now.
The other way you could profit would be to buy bonds. Now I think I've never really shown you this study before. Let's go ahead and look at to approximate bonds here we’ll use ten-year treasury notes. What I'm going to do is show you what happens when you short the interest rates, which basically means you're buying bonds. If interest rates go down, bonds are going up. Let's just go ahead and take a look at that.
I'm going to throw that on the chart here. Let's just go ahead and see how that timing model has worked. I need to go ahead and get in the trade station here and add a little bit of time. Let's go back 20 years. Even though the start of the Smart Money Indicator is 1995, let's go ahead and check that puppy out. Pretty decent overall. This is basically showing that bonds would go up with the smart money indicator is give a sale short signal.
This is not the ideal by the way. The ideal is the short S&P 500. If I go ahead and use SPY, let's just say you can see that the chart, the profit factor and everything is much better on there. You can see what an oversized move that was in 2008. I'm not looking for the same thing again.
Then you'll notice that when there is a loss; look how tiny it is in relation to the size of the winners. That's why the profit factor on this is over 11. That's pretty amazing. Sixty-seven percent, obviously not 100%, not a huge amount of trades.
It’s funny this indicator does not use price at all. It just uses what I told you which is looking at the money flow, dumb people and smart people. That's it. It’s not even looking at a price whatsoever, which I think is absolutely amazing. I think that's why after all these years that it's still my favorite indicator.
Let's just go ahead and sum it up real quick. Obviously, I put a lot of emphasis on the fact that this is not the perfect indicator. I don’t believe that actually exists. It is my favorite indicator for the reason being that it actually gets to the heart of what trading’s all about, where the edges in trading exist, smart versus dumb. Also, it's not going to catch exact tops.
Obviously, the top was in April. It's not exactly going to catch the exact bottoms. It just wants to catch the meat of the move. Again, we're dealing in terms of probability. We not dealing in terms of certainties here.
Again I think that's one of the reasons why people fail in trading is they think that every position has to win. You have to go ahead and put your money in the Coke dispenser and always get something back, which not the case.
Instead, good old grandpa George, got to love him, may he rest in peace wherever he is at. He told me at a young age - something is so funny that I find these little things that I was told at such a young age that are so profound nowadays. My Uncle Clarence, a lot of my relatives did have a lot of insight to the world. I do appreciate that. Hopefully I can instill those values into you as well and really help you out in your overall trading.
How I'm going to trade this now besides the long term stuff is to simply do the exact opposite of what I’ve been telling you since this whole thing started, now I'm going to go ahead and sale short rallies, and I'm going to go ahead and cover on the decline. I'm only going to trade in the direction of the Smart Money Indicator.
One of the ways to do that is to go ahead and buy SDS for the short-term timing models. Probably going a bit too far here, so let's just end it at that before I hit that ten-minute mark and everyone snoozes is on me, but I find that this is very important and again I'll put a lot of emphasis into this timing model, it is a great one.
See you next time. Dan Murphy signing off.