The smart money index is a way to gauge the “smart” money versus the “dumb” money. The premise is that the emotional money trades in the morning while the “smart” money waits until the last hour to trade. Most institutions place their trades in the final hour. The index subtracts the first half hour of trading and adds the last half hour of trading to come to the reported figure. The SMI has been rising for nearly a year which implies that institutions have been buyers throughout the downturn, ironically. During the 2002 bear the SMI peaked near 1,000 on a massive cascading sell-off. The SMI had been rising for most of 2002 and to the institutions’ credit the market turned quickly in 2003 – their timing was not all that far off.
I find this indicator to be a fairly good inverse indicator. We are approaching the same levels where the 2002 bear ended….The institutions have been piling in and late day buying accelerated sharply in the 4th quarter of last year. Does that mean my prognostication for a 3rd or 4th quarter stock market recovery is not that far off base?
[singlepic id=28 w=320 h=240 float=]
Click for larger image
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.