Email of the day on the Bloomberg Smart Money Flow Index
Comment of the Day

October 28 2014

Commentary by Eoin Treacy

Email of the day on the Bloomberg Smart Money Flow Index

If this is actually available, could you please add it to the chart library?

I'd like to analyze this index versus major market indexes, to see if it has any real value (given how it is constructed, I'm not convinced, but some folks seem to find it valuable).

Eoin Treacy's view

Thank you for this suggestion and I have added the Index to the Chart Library. Here are the notes attached to Bloomberg’s description of the Index:

The Smart Money Flow Index is calculated by taking the action of the Dow in two time periods: the first 30 minutes and the close. The first 30 minutes represent emotional buying, driven by greed and fear of the crowd based on good and bad news. There is also a lot of buying on market orders and short covering at the opening. Smart money waits until the end and they very often test the market before by shorting heavily just to see how the market reacts. Then they move in the big way. These heavy hitters also have the best possible information available to them and they do have the edge on all the other market participants.  To replicate this index, just start at any given day, subtract the price of the Dow at 10 AM from the previous day's close and add today's closing price.  Whenever the Dow makes a high which is not confirmed by the SMFI there is trouble ahead.

This description seems flippant, at least to me, and makes some very bold claims. I prepared the ratio of the Smart Index versus the Dow over the last 20 years. It appears to represent a coincident indicator for major tops and bottoms rather than any other factor. 

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