The one that's frequently quoted in mainstream media is for the Dow Jones Industrial Average. It suggests that investors and traders should follow the "smart money" instead of the "dumb money". The Smart Money Index trended lower from the 2nd half of 1971 - 1972 as stocks trended higher. This was a decently useful "bearish divergence" since the U.S. stock market made a major peak in January 1973. Fed funds futures already show that the probability of an interest rate hike in December is down from 80% to 69.9%and more downside will make this probability 0% before long. It's not true that the "dumb money" trades at the start of the day. For comparison, in 2019, the S&P500 was up over 31%. New mortgage applications are at 20-year lows and every statistical measure in the housing market is down. In late 2019, the signal dropped to the lowest level since 2004, which is not in the chart. Millennial investors are not used to a lot of volatility, as we were raised in a time with unprecedented market intervention. Stock market gains are now gone for the year, and we are in correction mode. (This is why I prefer quantitative trading over discretionary trading - it clears up ambiguity). That may be a distinction without a difference, but it's how we approach the markets. Inflexion points occur, and we may be there right now. First, we have the strategic bucket, which tends to focus on economic and fundamental themes that we believe might play out over a time frame of 6 months to a year. What counts as "start of the day" and what counts as "end of the day? Pausing in December already looks like it is on the table. Here's an example. If you believe you could benefit from a fresh look at your portfolio, please reach out to us. There is no hard-and-fast rule for how to use the SMI. If you fall into this category, try not to take offense. In the above chart, I have highlighted corresponding returns for the S&P500 from when the indicator went from one extreme to the opposite extreme. When an indicator has been saying "BEARISH DIVERGENCE" for 3.5 years, it isn't very useful for market timing because it encourages the trader to turn bearish too early. So how exactly is the Smart Money Flow Indicator calculated? If the stock market goes down but the Smart Money Flow Index trends higher ("smart money is more bullish relative to dumb money"), that’s seen as a “bullish divergence” for the stock market. Over the past 15 years, more and more volume has occurred near the daily close due to the rising popularity of ETFs. Dumb Money vs. Smart Money . The Smart Money Index measures market sentiment and the flows of capital in and out of the market. If the U.S. stock market rallies and the Smart Money Flow Index trends higher at the same time, that’s seen as a bullish sign of “smart money confirmation”. We think creating different portfolio buckets may be an optimal solution for investors to balance the long term with the short term. Smart Money Getting Trounced by Dumb Money. If the Federal Reserve truly wants to normalize its balance sheet via quantitative tightening and raise interest rates to normal levels, the stock market would have to fall 30%-50%. At SentimenTrader.com, our service is not focused on market timing per se, but rather risk management. But from a data-driven perspective, the last hour of each day (when the "smart money" supposedly trades, according to this indicator) always sees a spike in volume. Yet, it is not a replacement for a buy and hold strategy that many want to have but just can't stomach 100% of the time due to volatility and the noise within the news that so often ensues. As you can see, the beginning of the year brought about a major confidence shift. Average individual investors who trade money are often shoved under the “dumb money” umbrella. Focusing on the successes & sweeping failures under the rug doesn't do justice to actual traders and investors. The Smart Money Index's historical track record is mixed, and it isn't clear that its track record is much different from a 50/50 coin toss. It is no coincidence that higher interest rates have led to stock market volatility and a housing slowdown. It's not true that the "smart money" trades at the end of the day. BY STEPHEN MCBRIDE. Theory states that the stock market will probably go lower soon. It is often poor at marketing timing, though reasonably accurate during the meat of the trend, which we seem to be in early 2020. Calculating it by hand is tedious and most traders don't have a Bloomberg Terminal. If you have over $200,000 in investable assets, we are happy to offer a no-obligation review of your portfolio and even stress test it to potential market events. An indicator that should be followed is the Smart Money Index and money flows of the S&P 500. This indicator exists in different variations, but is based on the same concept: As a result of this concept, the Smart Money Index states that savvy investors and traders should bet on the stock market's direction towards the end of the day since that is what the "smart money" is doing, and bet against the stock market's direction at the start of the day since that is what the "dumb money" is doing.
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