Think about this as you think about privatizing Social Security
Quote of note:
He pointed to another "bearish divergence" - an increase in the "emotional money component" measuring the first half-hour of trading and a drop in the "smart money component" of the final hour. He said he expects either an abrupt drop in the market, or "a longer period of general weakness, until no one is any longer interested in stocks."
Conrad de Aenlle
EVER wonder what the smart money is doing? Walter Hertler, a technical analyst, thinks he has it figured out, and many stock market investors won't like the news.
Mr. Hertler consulted the Smart Money Indicator, a measure sometimes used to try to distinguish the activity of the wiliest professional investors from that of the less astute and less rational public. That barometer has sent one of its strongest sell signals in years, said Mr. Hertler, publisher of Hertler Market Signal Updates.
"The current sell signal appears to me to be comparable to the one that preceded the 2000 tops in the various stock indexes," he said. Followers of the index would have exited the market in early 2000, when the indicator peaked well below its old high as the market rallied to record levels. The signal came just in time to avoid the bursting of the Internet bubble.
Investors would have been able to get back into stocks fairly close to the bottom in 2002 when the reverse happened: the S.M.I. failed to reach a new low when stocks did.
The S.M.I. comes from the notion that investors who are driven by emotion, perhaps incited by the latest economic or corporate news, do much of their trading early in the day, while craftier, more deliberate investors prefer to do their buying and selling as the close approaches.
The indicator is based on work done by analysts in the 1960's who observed that activity in the final hour was a good predictor of the market's future direction.
The measure is calculated by subtracting any gain (or adding a loss) in a stock index in the first half-hour of trading - any stock index will do - and adding any gain (or subtracting a loss) in the last full hour. So if the Dow is down 30 points early and rises 50 points in the last hour, the index is deemed to have gained 80 points more than its actual movement for the day.
This arithmetic has the effect of penalizing buying done by presumed dumb money and giving extra credit to buying by smart money. If smart money is buying heavily, the S.M.I. moves ahead of the index, and when smart money is bailing out, the S.M.I. trails it. Mr. Hertler has noticed the second pattern lately.
