Who you gonna believe, smart money or dumb money?
There are times when the trading activity of smart money—that is, institutional investors, hedge funds and that illustrious ilk—differs markedly from the dumb money. On Wall Street, the latter is the less than respectful way the pros refer to the retail investor, and it has always reminded me of the great book, “Where are the Customers’ Yachts.” (The title refers to a story about a visitor to New York who admired the yachts of the brokers. Naively, he asked where all the customers’ yachts were? But none could afford yachts though—or because—they followed their brokers’ advice.)
The smart money indicator, as traditionally interpreted, says that the emotional ‘dumb’ money tends to trade in the morning, typically at the open, while the more measured ‘smart’ money waits until the end of the day to make moves. It’s trend-based view of intraday price patterns demonstrating investors’ sentiment. It was popularized by money manager Don Hays.
The main idea is that the majority of traders (emotional, news-driven) overreact at the beginning of the trading day because of the overnight news and economic data. There is also a lot of buying on market orders and short covering at the opening. Smart, experienced investors start trading closer to the end of the day, after having the opportunity to evaluate market performance.
If smart money is buying an asset and dumb money is selling, the pros take that as a bullish sign. The inverse is taken as a bearish sign.
You might or might not agree with that, but there’s a contrarian logic there. But what does it mean when they are both buying? That’s the case in 2019, according to data from Bespoke Investment Group.
For BIG, “dumb money” is considered to be the more reactive traders/investors who trade based on the headlines right at the open. Conversely, the more thoughtful “smart money” waits for things to shake out before acting. In order to track the sentiment of each group and make comparisons, BIG considers the dumb money to be the market’s action during the first half hour of the trading day, while the last hour of the trading day is representative of the smart money.
Let’s start with the latter, since they are supposed to be so smart. What are they doing with equities? In short, they are buying.
In a recent report, BIG notes that in 2019 there has been a consistent trend of buying in the last hour of trading and that’s continued into the first half of July. The S&P 500 index’s average last hour gain of 11 basis points as of mid-July is nearly twice the average of any other hourly interval.
The chart nearby shows a composite of the S&P 500’s intraday performance in 2019 (blue line) and so far in July through 7/16 (green line). As shown in the chart, the last hour of trading has been positive both on a year to date and month to date basis. That kind of strength into the close is generally considered a positive trend as it indicates a willingness on the part of investors to tolerate the overnight risk of any potential negative headlines. That’s even more impressive these days given all the potential issues swirling around out there, BIG says.
The chart below breaks out the intraday performance of the S&P 500 on an hourly basis throughout the trading day so far in 2019. For the entire year, performance has been strong nearly throughout the day.
You can see that the so-called “dumb money” has been buying too, at the open. The strongest interval of the day has been the opening half-hour with an average gain of 3.4 basis points, and the only hour of the day that has averaged a decline is the hour from 2-3PM Eastern time. From there, though, the bulls have stepped in during the last hour of the day and the rally reaccelerates.
To me, this suggests that—as our team has been saying on this website—that it’s rally on for stocks. I’ll be watching for what the so-called smart money does, and if they begin to sell en masse, it would be a negative sign, especially if “dumb money” kept on buying.
Last week, the Standard & Poor’s 500 index closed at 2,932, down 3.1%.
Quote of the Week: WSJ: An [Instagram] ‘LIKE’ has value beyond its function as a digital ego stroke.
Questions? Contact Vito J. Racanelli at vito.racanelli@fsinsight.com or 212 293 7137. Or go to www.fsinsight.com.
