New York - When equity markets shuddered last summer during
the European debt crisis, the smart money bought the weakness in a precursor to
a big rally into 2012.
After easing off, those buyers are back in the market. That
suggests the stocks rally may be about to take off again after renewed concerns
over Europe pushed retail investors onto the sidelines in early February.
The question to ask about the smart money isn't who, but
when.
While the opening minutes of trading are dominated by retail
investors reacting to morning news, it's the close of the session that matters
more. That's when institutional investors who have spent the day digesting the
data and headlines stake their claim.
"The smart money was buying heavily into last year's
weakness, and then stalled out towards the end of the year," said Paul
Hickey, an analyst at Bespoke Investment Group in Harrison, New York.
Hickey has compiled data on the first half hour and last hour
of trading in the S&P 500. His figures show late-day traders started to buy
from summer of 2011, a precursor to a big market rally later in the year.
The late-day buying by the smart money that began in the
middle of 2011 preceded a near 30% rally in the S&P 500 that began in
October.
After a period of stagnation by the so-called smart money,
their performance has picked up again of late - and can be viewed as a leading
indicator for the overall market.
"In the last several days the smart money has perked up
again and actually made a new high for the first time since October 21,"
he said.
Around 20% of the trading volume in S&P 500 stocks is
concentrated in the last 30 minutes of trading, according to Credit Suisse. A
further 10% is during the first hour.
Professional traders are keen to get the best price possible
and often wait until the end of the day to get a better idea of where in the
day's trading cycle they are buying.
Their performance for institutions is often judged by
comparing the price they pay for their target stock against the volume weighted
average price VWAP.L for the day. This shows the price where the heaviest
trading took place, and by waiting until the end of the day traders can judge
how their trades will compare to daily VWAP.
"We've had days when we were down early and then we had
late day rallies and that's generally pretty supportive of smart money,"
said Jack Ablin, chief investment officer at Harris Private Bank in Chicago,
who oversees more than $50bn.
One new wrinkle in daily activity, however, is the close of
European markets at 11:30 ET. Of late, the US stock market has tended to rise
after that market closes and news from the region diminishes.
David Lutz, managing director of trading at Stifel Nicolaus
Capital Markets, Baltimore, has been keeping tabs on the trend. By his
calculations, as of Thursday 26, of the last 30 trading days, the market has
ended higher after the European markets close.
"A lot of people have been trading that trend,"
said Lutz. "I think people have been a little bit cautious on their sell
tickets on down mornings here in the US, anticipating some kind of pop later in
the afternoon.
"The worst thing a trader could do would be to blow out
a big sell order at noon and watch the market rip north going into the bell,
especially when we have statistics around it that are showing it's not
necessarily the smartest thing to do," he said.
If avoiding getting blindsided by news from Europe is the
reason for the dislocation between the open and the close, it suggests
additional caution by traders, who remain concerned about what is called
"tail risk" - the unknown surprise factor.
"We could have a huge downdraft off the simplest bad
news," said Brian Battle, vice-president of trading at Performance Trust
Capital Partners in Chicago.
Markets can move late and fast for other reasons, too. In
less than an hour on October 4 the US stock market surged 4% into the close,
with an explosion of algorithmic trading cited for the move.
Some question the validity of the smart money approach
altogether. In an age of 24-hour news, gone are the days when investors just
looked at the morning paper and nightly TV news.
"Now that we get news by the second we not only react
but overreact throughout the day," said Marc Pado, US market strategist at
DowBull.com in San Francisco.
Still, sharp late-day moves suggest institutional interest
with the muscle to move the market at its busiest time. If these buyers are as
shrewd as they were last year, the rally may have some juice left.
"Generally speaking it's a good leading
indicator," said Ablin.