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Hertler Market Signal provides investors with a mostly weekly stock market newsletter, Hertler Market Signal Update (HMS Update). In addition to current readings of numerous technical indicators, HMS Updates provides analysis of the Smart Money Index.

 What is the Smart Money Index?

The Smart Money Index (SMI) is a composite sentiment indicator that is based upon intra-day price patterns in the Dow Jones Industrial Average. This Index was described nearly twenty eight years ago by Lynn Elgert in the February 22, 1988 issue of Barron’s. The Indicator was credited with correctly signaling in advance the 1982 stock market bottom, and the 1987 market top. The Smart Money Index subsequently provided advance warning of the July 1998 market top, the October 1998 market bottom, and the January 2000 DJIA top. Thus, this Index had a stellar record of providing advance warning of important stock market turning points. The Smart Money Index was featured in an article by Conrad Aenlle in The New York Times February 13, 2005.

The Smart Money Index is based on the idea that emotional, news-driven investors tend to trade during the first half-hour of trading, while the more rational, professional investors tend to trade during the final hour after evaluating the day’s action in the markets. The Index is calculated by subtracting the change in the Dow-Jones Industrial Average during the first half-hour of trading from the change during the final hour, and then cumulating. For example, if the DJIA were to rise 100 points in the first half-hour and decline 50 points in the final hour, there would be a net change of –150 points in the Smart Money Index for that day, and this would be subtracted from the cumulative value of the Index. Among sentiment indicators, this Index is unusual in that it combines the actions of the "dumb money" (as a negative contribution) and the "smart money" (as a positive contribution), with the two classes identified by the time of day that their trades are recorded.

Since the 2000 stock market top, the Smart Money Index has failed to keep pace with the major stock indexes (see Chart 1), while the two components of the Index have come to the forefront as useful indicators of market-direction. At the early 2003 market low, the cumulative change in the DJIA during the first half-hour of trading (we call this the EMC – Early Market Component) has been correctly calling the shots in market direction (see Chart 2), while the LMC, the Late Market Component (final hour change in DJIA), has helped with short term secondary trends.

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