Smart Money Index

the following is from a message posted on EUF.

the original url is:

I find the article quite thought provoking in relation to the way that the FTSE100 moves each day in relation to the emotional first hour and the smart money last hour.

Any thoughts?


Don Hays is quite bullish based not only on TRIN and P/C ratios but also on his Smart Money Index.
I first read of this Smart Money Index, in an article the developer Lynn Elgert wrote in Barrons in the months following the 1987 crash. It had called that crash with a lead time of several months. It doesn't call every move, but when it has made a decisive signal by not confirming the action of the Dow Jones Industrial index, from which it is based upon, it has been virtually perfect on its predictions. The SMI continues to be very bullish, and indicating that a bottom formation is being put in here. It was very encouraging a few weeks ago as the Dow Industrials was backing off some, that this index moved to a new high. This is a strong confirmation that the Arms index signal above 1.5 in March, and again above 1.45 in the last two weeks will once again prove to be highly accurate. The recent new high on this index, while the rest of the market continued to correct is further confirmation that the correction should be considered an outstanding buying opportunity. It is saying with authority that the smart money still considers this a Bull Market. As noted in last week's comments, this SMI had turned down a very small amount on the sell-off of three weeks ago, but the strong snapback this week has certainly eliminated those short-term concerns. The Smart Money Index is once again telling us that dumb money is driving this market down on the latest weakness, and is giving a buying opportunity to "smart" investors.

Explanation of SMI: This is an index that is furnished to me by one of my subscribers who has been compiling this since he read it in Barron's (and I remember reading about it to) shortly after the market crash of 1987. It is a cumulative index that only includes the market (DJIA) performance in two time periods each day. It is prefaced upon the principal that the trading during the first 30 minutes of each day is very emotionally based, and depends so much upon the fresh "hype" of the morning news and media "talk." That is considered "dumb" money. But the trading in the last one-hour of trading is not very news motivated at all, in fact it is based solely upon the overall reasoned out logic and analysis. That is considered "smart" money. So the cumulative index simply subtracts the performance of the Dow during that first 30 minutes, and adds the performance of the last one-hour. The signals come when the "Smart Money" index does not confirm the new highs or lows of the Dow Jones Industrial Average's. I think the basis for this index is ingenious. It only includes two times in its cumulative progress. It subtracts the action of the Dow Jones Industrial Average during the first 30 minutes of the day. Very obviously, the first 30 minutes of the day is the most emotional time of the trading day as all the news releases, analyst upgrades/downgrades, and morning financial news programs are hyperventilating over the latest corporate or government bit of jabberwocky. When Maria does her handstands and cartwheels (Ra Ra Ra), highlighting the morning’s hype through her cheerleading megaphone, the juices of those unsophisticated “dumb” money investors rush to enter their market orders before the opportunity to “strike it rich” gets away. So very intuitively, trying to measure just the smart money this index totally subtracts that 30 minute’s performance from the ongoing cumulative total. The least emotional time, of course, is the last one hour of trading. Very rarely does any news come out in the afternoon hours. So the investing that is done in the last one hour is generally more a function of a thought-out reasoning process. This index adds the Dow’s performance of the last one hour. The stellar performance of this index shows that in the times that the upward slope of this Smart Money Index confirms new highs in the Dow Jones Industrial Average itself, the market’s progress is healthy and more upside remains. But conversely, when the Dow makes new highs, while this index is dropping well below its high, it is a signal that the BIG money, the “smart” money is very persistently headed for cover. This index has really hit a lot of home runs, calling the serious declines in 1987 and 1998 well in advance. It tends to have a lead-time of 75-85 days, which is good, but also very testing to its followers.>>>
well, I read that post on Eufinancial as well. and as I follow the Dow was interested to see, that (before 11Sept) it was WRONG.. the Dow fell.

After 11th September is history of course.

Personally I doubt it as an index: there's lots of short closing at day end in falling markets which tends to drive the index up...