Smart money may be selling this market.

October 22, 202010 Comments

The S&P 500 has been in a pattern that is considered bearish by some market observers. This pattern plays off of an old theory suggesting that “dumb money” trades in the morning, while “smart money” trades in the afternoon.

Here is how it works:

Dumb money is thought to move in the morning.  Retail investors trade in reaction to recent news events or sentiment. They are reacting to very recent or even old news – myopically. Their knee-jerk trades can create sharp price movements in one direction. The first hour or so tends to to be the most volatile period, providing plenty of sophisticated day traders to take advantage of this movement. Program trading reacts quickly to breaks in various moving averages on an intraday basis – adding to the fun. Although it sounds harsh, professional traders often know that a lot of “dumb money” is flowing at this time. So do the program traders.

Smart money is thought to move the later part of the trading day.  Stocks are ready to be scooped up by the pro’s on the fear trade of earlier hours, or sold by the pro’s based on knee-jerk bullishness. Theoretically, the selling pressure in the afternoon can be more significant as a predictive indicator than buying pressure in the afternoon. That’s because of the longer termed bullish bias of stock markets to go up. Selling indicates a more unusual conviction by the smart money than does buying.

That may be what we are seeing right now. The chart below is a 5-minute bar chart. Note the period from around 2:00pm to close (4:00pm) over the last 4 days. Its been down. I’ve highlighted those periods with a thin red circle for your “viewing pleasure”.



Ok, now lets look at the more traditional smart/dumb money indicator. The best out there is published by I use this indicator in my Bear-o-meter risk/reward compilation. Here is my last reading of the Bear-o-meter. The smart/dumb indicator pits the most successful investors (smart money) against the least successful investors (dumb money) in a quantitative model.

Examples of some Smart Money indicators include the OEX put/call and open interest ratios, commercial hedger positions in the equity index futures, and the current relationship between stocks and bonds. Examples of some Dumb Money indicators include the equity-only put/call ratio, the flow into and out of the Rydex series of index mutual funds, and small speculators in equity index futures contracts.

The sentimentrader chart below shows us how the smart money –  the blue line – isn’t very bullish at this point. Meanwhile, dumb money – the red line – is “Lovin’ every minute of it”. Just like the song from Loverboy

Note how when the blue line drops below its horizontal trigger line while the red line (dummies) climbs into a high-confidence level – coincidingly – markets tend to react in the favor of the smart money. They often sell off if smarties are worried and dummies are singing the Loverboy song. That’s where we are now.


Dumb money is buying in the morning and smart money is happily selling to them. The dumb guys are confident with that decision to buy while the smart guys are net bearish, according to the sentimentrader chart. Both of these indicators might give us pause before we commit to buying new stocks at this time.

As Forest Gump once said:




    • Tom -no smart/dumb indicator available from sentimentrader on the gold producers, but they do have an “OPTIX” which combines put/call ration plus some other volatility and technical data. Its in the middle of its range, somewhat closer to the “buy” zone than the “sell” zone. So, its basically neutral in sentiment with a slight positive edge.

  • I’ve recently become sort of interested in bonds or bond ETFs. I normally eschew bonds but I have noticed that XLB has outperformed the TSX almost every year and certainly this year in spades. And it has returned an average of about 8% per year including dividends. Not too shabby.

    • That’s because rates declined over the past, Fred. Bonds rise when rates fall, to put it simplistically (yield curve points differ, but its a good rule of thumb to think around the negative correlation between monetary policy and bond returns). Rates could go slightly lower, but not too much. Bonds will not return so much in the future, methinks.

  • Hi Keith,

    Can you give your over view of the market reaction before and after election day for SPY 500 and Canadian dollars. is it a good idea to hedge now.

    Thank you


  • Money appears to be flowing into Emerging Markets.

    I hold and it appears to have broken out.

    Would you agree?

    • We hold the BMO version, which has broken neartermed resistance but has a couple bucks to go before all time highs are taken out. VEE is currently testing neartermed resistance near $36–I’d assume its not busted that given a slightly differing mix(?). If thats broken, then $38 is the all time high on that chart

    • Sorry Krista–I have never heard of them. Not my bag, I tend to focus on sector and commodity ETFs for trading


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