Posts filed under “Sentiment”

Recalling the Smart Money Index

One of the articles in my morning reads yesterday was an intriguing story by the Wall Street Journal with the headline, “Why Morning Is the Worst Time to Trade Stocks.”

It reminded me of someone who in my early days in the 1990s was very formative in my philosophy of markets and investing: Don Hays. (See this 2001 Barron’s interview to get a flavor of his views). He was a big proponent of the Smart Money Index (SMI) — first described byLynn Elgert in the Feb. 22, 1988 issue of Barron’s — and is the person who is most often credited with popularizing it. We will get to the SMI shortly.

Several things made Hays a fascinating mentor to a green trader like me. First, he was a rocket scientist. That isn’t an exaggeration — Hays was a former aerospace engineer, and was part of the team that developed the Saturn rocket for NASA.

Second, Hays used what seemed to a younger (and thinner) me to be a very rational approach to markets. His philosophy was quantitative, evidence-based and data-driven. The framework he worked off of used four factors: trend, investor psychology, monetary conditions and valuation. It all seemed very reasonable, especially when compared with the touchy-feely approaches that were so popular elsewhere, especially among the punditocracy.

Last, it didn’t hurt that he was pretty much the most accurate market strategist in the 1990s. He successfully navigated the slowdown in 1994 when the Federal Reserve raised rates and the weakness in 1997-98 amid the collapse of Long-Term Capital Management. Hays stayed bullish until sounding a prescient warning in early 2000. He lost his touch in the 2000s, but let’s hold off on that story for another time.

Nevertheless, the Wall Street Journal article speaks to Hays’ fascination with the SMI.

The SMI is calculated by comparing the trading action of the Dow Jones Industrial Average during the first 30 minutes of the day versus the last hour before markets close. You can find updated versions of the index at Sentiment Trader.

I am unconvinced this still has much applicability in the modern era, but it is a good jumping off point for a broader discussion.

The first half hour of stock-market trading has been described as “dumb money.” It can be emotionally driven buying and selling, based on news flow or overseas action from the night before. Just think about it: How smart is trading based on what happened while you were sleeping? In a rising market, it engenders a sense of chasing market moves higher; as we have seen, those gains can and do often fade. In a down market, it leads to selling into weakness.

The flip side to this approach is end-of-day buying. It tends to be more pragmatic then emotional. It is often institutional in nature. Rather than making a decision driven by fleeting sentiment, institutions tend toward an investment posture that is executed according to a plan. The buying, often measured by metrics such as volume-weighted average price, can also be a ploy traders use to demonstrate to portfolio managers that they are getting the “best price.”

No two markets or periods in financial history are identical. The current era has seen a major shift in market structure, and perhaps a chastened public that’s less inclined to dabble. Maybe the SMI has been rendered obsolete, a victim of high-frequency trading, the declining importance of the Dow as an index and the shift toward exchange-traded funds. Regardless, it might pay dividends to pay attention to early and late widening of bid-ask spreads and understand what’s driving them. Pardon my cliche, but I wouldn’t necessarily say that the early bird gets the worm, though the second mouse does get the cheese.


Originally published as:  Being Late to a Trade May Not Be So Bad





Category: Sentiment, Technical Analysis, Trading

Barron’s: Strategists Are Still Bullish

This is an interesting cover from a sentiment perspective, although its not much of a surprise that the Bulls are still bullish.

Category: Financial Press, Sentiment

What If They Threw a Panic and No One Came?

Source: Bianco Research     “Its enough to give a long-term investor some hope for the future of finance.”   Here’s a bit of role reversal for you: Mom and Pop were content to ride out the market’s volatility this past month, more or less sitting tight. Meanwhile, the pros were driven to the point…Read More

Category: ETFs, Investing, Psychology, Sentiment

Data Points to Ponder During Today’s Selloff

China’s markets set the tone for the day (and perhaps the week) with an 8.5 percent blood-letting. Global stocks followed suit, which came after last week’s 5 percent tumble. Rather than tell you that markets are oversold — you already know that anyway, and oversold markets can become even more oversold — I want to bring a…Read More

Category: Investing, Markets, Sentiment

Reminder: Stocks Go Up AND Down . . .

I am reminded how utterly worthless as a market observer/financial adviser Suze Orman is in this series of tweets. Its simply amazing how much terrible advice and lack of comprehension people can reveal in a mere 140 characters.   “Demands for low rates begin as the financial class panics”   Hat tip: Vulgar Trader

Category: Markets, Really, really bad calls, Sentiment

How to Destroy A Market, China-Style

Click for ginormous chart A market, by definition, is a place where buyers and sellers can come together to exchange goods and services. That involves buying and selling those goods. Once you eliminate that free trading, you no longer have a market. Then there is China, where the authorities have suspended the sale of half of the…Read More

Category: Markets, Sentiment

Colbert Shows How to React to a Market Collapse


A message from the Supply Lord of The Afterscape.


Apocalypse Dow

Hat tip WSJ


Category: Humor, Markets, Sentiment, Video

The World’s Most Respected Companies

Source: WSJ

Category: Corporate Management, Sentiment

NFIB: Why So Negative?

Small business sentiment readings are now over their 20 year average, and have moved steadily higher since the crisis ended in 2009. If that uptrend was a stock price, all your momentum trader friends would be buyers. But you certainly would not get that from reading the NFIB news releases. They have been consistently, persistently,…Read More

Category: Economy, Sentiment

Post Traumatic Crash Disorder & the 1962 Flash Crash

click for ginormous chart Source: Bloomberg On this day 53 years ago, Wall Street had one of its worst sessions ever. As the Wall Street Journal reported, “The Dow Jones Industrial Average fell 5.7%, down 34.95, the second-largest point decline then on record.” It was part of a longer decline that some called the “Kennedy Slide…Read More

Category: Markets, Psychology, Sentiment