I don’t know it’s exact construction, but it’s based on the early morning trades being the emotional and news driven trades (dumb money) while the late afternoon trades are the more reasoned trades (smart money). It is constructed by subtracting the early morning volume (first 30 minutes using Dow volume) from the late volume (last one hour using Dow volume).

I don’t know if any correction is made for the time periods being different, etc. In short, I’ve told you more than I really know, but I try not to let that constrain me.

I have read that the SMI has hit a lot of home runs, calling the 87 and 98 declines. I have also read that it has a lead time of 75-85 days, so it may not be able to be used to find a market bottom.

I am exposed to SMI through a subscription service, so I can’t provide a link. I can tell you that the SMI has been in an almost straight line decline going well back into 2006, until the past two weeks, when it has started to climb.

Conversely, those indicators that so far haven’t given a buy signal will have been shown to be correct. So why not look just at those so far correct few for the REAL buy signal, ignoring all of the wrong indicators?

The Rydex ratio, which is a measure of sentiment, has consistently shown a greater bullish bias than at the August low, an even greater bullish bias than at the March low, and a much greater bullish bias than at the 2006 lows. Now this sentiment as reflected by Rydex, is not simply what one thinks of the market as expressed by a bull/bear opinion, but it is how a large population of retail investors (supposedly dumb money) are actually invested.

Similarly, the investors intelligence numbers and the OEX option players (smart money) are out of whack for calling a low. The smart money index has shown consistent selling by the smart players until just recently, and remains well below previous readings at market lows. (more on this below).

btw, what’s the smart money index?

Among the few indicators that have not signaled a bottom are the Rydex ratio, Investors Intelligence, the smart money index and the OEX put/call ratio. Babak, perhaps you know of some others and could list them.