There is a theory within technical analysis that says dumb money moves in the morning, while smart money moves in the afternoon. Some technical studies narrow the movements down to the first hour of the day vs. last hour of the day. The logic of the theory lies in the belief that retail “dumb money” tends to react to the news or to what happened yesterday, and can “melt up” or “melt down” the market in that first part of the day by their panic/ecstatic moves. Meanwhile, smart money sits on the sidelines calmly watching the trading – and enters into the fray to try to take advantage of this emotional buying or selling by cheerily giving the crowd what it wants (i.e. selling into the irrational exuberance, or buying off of panicked weaker hands).
If you follow “Smart Money/ Dumb Money” studies–you want to follow the smart money and fade the dumb money. To some degree, I respect the theory of afternoon money being “smart”, but it does not influence me too much to trade in the direction of the afternoon movements. That’s because way back in the late 1990’s—I had to write a thesis in order to earn my CMT designation. These days you can get away with writing 3 separate exams to get the designation, but back then it was 2 exams and a thesis—no third exam. As a student of sentiment studies, I decided to try to prove or disprove the validity of this concept. Back then there wasn’t a lot of stock data available on the internet. So I went to the Toronto Public Library and spent hours looking through the Wall Street Journal newspapers on microfiche, which back then had hourly data on the DJIA. I recorded the first/last hour of trading over a fairly long period of time—about 10 years of daily data I believe it was. It took a looooong time to do the recording off of that microfiche! I then formulated a study to compare the two time periods of movements. After all of that painstaking data gathering and number crunching—the conclusion I came to was that the first/last hour study was random in predictive power. In other words, it’s a theory that seems logical, but – at least back then—didn’t actually work to help you predict market movements.
The chart below is the daily movements of the markets on a 30 minute chart. Each gray horizontal grid is a day. The dashed green line is me eyeballing the halfway point of the day (forgive me if I am a little off here and there). I put up arrows for closes that were at least equal to the mid-way point of the day but also showed positive movement in that last hour or so. I put down arrows where there was a definitive move down in the latter part of the day—again focusing on that last hour.
It’s a small sample, so take that for what it is. But I’m still not seeing predictive indications for the markets—even where there is a cluster of up or down afternoons. I had to leave the office before market close on Friday so there is no arrow for that day–but I am sure you can see what happened on Friday for yourself. Whatever the case, it looks like the follow-through for afternoon movements is still pretty random.