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Written by: Steven Vannelli, CFA | Knowledge Leaders Capital
The Smart Money Index was constructed by Don Hays and measures the market action in the first half hour of trading and the last hour of trading. The indicator shorts the first half hour of trading as it is supposed to represent the trading by retail traders. It then is long the last hour of trading, where institutional, or the “smart” money trades. Each day the indicator is calculated and the new day’s reading is added to the prior day’s reading.
When the Smart Money Index is rising it is indicative of the behavior of the two groups: where retail traders are negative at the opening and institutional investors are long into the close. All year, the Smart Money Index has tracked the S&P 500 closely, and when it fell—reflective of “smart” money selling—the S&P 500 sank.
Right now, we are seeing an interesting divergence that is only about six days old. On June 29, 2022 the Smart Money Index turned up sharply while stocks fell. Of course, no single indicator captures the behavior of the market, but in a “weight of evidence” approach, it does suggest, along with many other indicators (see Bullish Back Half) that stocks may have found an intermediate low and the direction of travel is now higher.
