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Does ‘Smart Money’ Wait To Trade?

  • Written by Syndicated Publisher No Comments Comments
    October 4, 2013

    For many years in articles, and in my books, I’ve written that investors should not place buy or sell orders until after the market is open, and particularly not by computer the night before.

    My reasoning was that by doing so they may miss important overnight or early morning news or reports that might affect their decisions, or affect the limit prices they set on their orders. And they aren’t getting ahead of anyone as many think. All those orders do is pile up on the market-makers’ electronic ‘books’, and become part of the balancing of buy and sell orders that takes place in the seconds before the market opens.

    And there has always been the old saying that a market that is strong in the morning and weak in the afternoon is in a bearish mode, while a market that is weak in the morning and strong in the afternoon is in a bullish mode.

    The explanation was always that retail investors tend to place their orders in the morning before they head off for work or golf, and base their decision on what happened the previous day, while institutions and other professionals are on the job all day when the market is open, and wait to see what develops before making trades. So their buying or selling should be more indicative of market direction.

    An article in Business Insiders yesterday called my attention to an interesting indicator thatBloomberg runs based solely on that intraday trading, to determine whether so-called ‘smart money’ is buying the market, or selling into it, over the longer-term.

    Bloomberg calls its indicator the ‘Smart Money Flow Index’.

    Bloomberg and Business Insiders description of the index is that “It is calculated by taking the action of the Dow in two time periods: the first 30 minutes and the close. The first 30 minutes represent emotional buying, driven by greed and fear of the crowd based on good and bad news. There is also a lot of buying on market orders and short covering at the opening.”

    “Smart money waits until the end of the day and they very often test the market before by shorting heavily just to see how the market reacts. Then they move in the big way. These heavy hitters also have the best possible information available to them and they do have the edge on all the other market participants. . . . . Whenever the Dow makes a high which is not confirmed by the SMFI there is trouble ahead.”

    The index over the last year, compared to the movement of the Dow:

     

    smart money flow index vs dow

     

    The Dow has made three new all-time highs this summer, in May, August, and September.

    But those highs were not confirmed by the Smart Money Flow Index. It has been trending lower since May.

    Has ‘smart money’ been smart with that selling since May?

    It is interesting that since their May peaks on May 21, the Dow is down 1.7%, the S&P 500 is up only 1.1%, and the NYSE Composite is up only 0.9%.

     

    100313a

    But then again, the Nasdaq and Russell 2000, the favorite playing fields of retail investors, who supposedly do their trading in the morning, are still hitting new highs.

    100313b

    So they have been right too.

    But since it can’t go on too long, that half the market is in trouble, and the other half is still hitting new highs, who will be right longer-term?

    To read my weekend newspaper column click here:   Everything Still Looks Bullish – In The Rear-View Mirror

    Subscribers to Street Smart Report: The new issue of the newsletter from yesterday afternoon, and a hotline from last evening, are in your secure area of Street Smart Report.com.

    Images: Flickr (licence attribution)

    About The Author – Sy Harding, Street Smart Report

    Sy Harding publishes the financial website Street Smart Report Online and a free daily Internet blog at Sy’s Free Blog. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!

    It includes our research and analysis on the economy and markets, and provides charts and buy and sell signals on the major market indexes, sectors, bonds, gold, individual stocks and etf’s, including short-sales and ‘inverse’ etf’s.

    It provides two model portfolios as guides. One is based on ourSeasonal Timing Strategy, one on our Market-Timing Strategy.

    In depth updates are provided every Wednesday, with interim ‘hotline’ updates every time we make a trade. An 8-page traditional newsletter Street Smart Report is provided on the website every 3 weeks, in pdf format for viewing or printing out.

    There is the Street Smart School of online technical analysis ‘seminars’,commentaries to keep you ‘street smart’ about Wall Street, and much more. 

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