The other day I came across this chart of the S&P 500 e-mini with Large Speculators (Green Line), Small Speculators (Blue Line), and Commercial Speculators (Red Line, plotted on the bottom. Large Speculators represent smart money as they are usually correct in picking market direction.
On the chart below, we can see smart money is currently short even more than they were prior to the flash crash, and that they also have been short at every market top (pink highlighting). They seem very determined- from this chart- to take this market lower.
Click to enlarge:
Now, by smart money being excessively short, this could mean only one thing. This market is going to have a large move somewhere in the near term, it is going to be quick and swift, and most likely biased to the downside. This could originate from some sort of news, or it could be purely random. But when smart money puts all their bets into something like this, something is bound to happen. The reason I say biased to the downside is because this market could continue higher, in which smart money will be wrong (which is very rare, as we all know). This itself could make the market explode through highs, as they will need to cover their shorts. However, once again, as smart money is rarely wrong, I would be biased lower.
In this situation, I would be watching the news and reports very carefully for something out of the ordinary to propel this market somewhere, but we shall see. In the mean time, I would be protected in something like the VXX (VIX Index), TLT (Bonds) or the UUP (US Dollar) as they usually trade inverse to equities. I would NOT put my money into the Japanese Yen however for protection because it seems extremely overvalued right now.
Disclosure: No positions