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FRED GOODMAN'S KEY INDICATORS FOR
INVESTMENT SUCCESS
The accompanying chart of the Smart Money Indicator has not been shown until now. I didn't show it because I did not feel that it added anything to the analysis of "smart money." As a brief review, this indicator is calculated by subtracting the change in the Dow during the first half hour from the change in the Dow during the final hour. It is based on the assumption that overnight and early morning traders are amateurs who trade before going to their regular jobs. But the majority of trading done in the final hour is done by professionals whose regular job is to trade the markets. Therefore, it is logical to discount the early trading, so it is subtracted from the closing trading. The light blue line shows what has happened to the Smart Money Indicator during the last 4-3/4 years. Notice that a decline in the blue line -- the Smart Money Indicator -- has preceded sharp declines in the market, while advances by the line have preceded rallies. Now look at the pink line. The pink line plots the change in the Dow during just the first half hour. During most of the period the pink line has mimicked the S&P. It has climbed when the S&P climbed and it has fallen when the S&P fell. However, since 9/11 it failed to move up until very late in the rally, and it continued to rise until mid-April, long after the decline started. Furthermore it completely missed the rally that started in July and has continue to fall unabated through that rally, and it continues to decline now. The public is clearly disgusted with the market. The green line represents the final hour of trading, and the arrows designate accelerations in buying that occurred at the beginning of rallies. During the final throes of the "bubble," the green line moved with the market and with the early trading so there was very little change in the blue line. However, the pros could see the end of the rally coming and they clearly started selling in late November of 1999. They continued to sell until Late January of 2001 at which time they went on a buying spree that continued until April and resumed after 9/11. They sold all through 2002, until the July bottom, and then buying resumed, but only for a few weeks.
Take a look at the next chart for a close up. This shortened chart covers only 15 months, so it is easy to see (look at the circle) that the pros started to sell again in August and are still selling. The only reason that the Smart Money Indicator is still climbing is because the pros are not selling as fast as the amateurs. This is different from any period in the nearly 5 years. In every case up to the present, when the indicator was climbing it was because the pros were buying. This time it is because they are not selling as quickly as the amateurs. That is not very reassuring. As you look back over the two charts, please note that the best rallies were accompanied by an advancing green line and a decline by the pink. Now they are both moving down.
Fred Goodman, CFP, is a fee-only Certified Financial Planner based in Los Angeles. You can send him your questions and comments via email at Fred@MarketMonograph.com. The charts and commentary represent what Fred is thinking about the market and thinking of doing for his own account and for accounts he manages. There is no guarantee that you will profit from trading as discussed herein. You may lose money and Fred assumes no responsibility for what you do or do not do with this information. 
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