What is Smart Money when Investing in Stocks?

Experienced Traders follow the Smart Money. Now, most investors out there are clueless what this means because you're busy going to a 9 to 5 job. Investors just want to make money and as long as they observe their portfolio increasing, that's all they care about. Well, I'm here to report to you that there is a lot more than you know of what goes on behind the scenes. It does affect your investing. It's called "Where is the Smart Money?" Where the Smart Money goes determines whether the market is going up or down. So, how do you find the Smart Money? Well, it doesn't hurt to find some good investment forums because most traders will post weekly updated chart positions of where the Smart Money is - long or short the market. Or you can go to the source and try and figure it out: http://www.cftc.gov/cftc/cftccotreports.htm

First, I'll give you an explanation of what Smart Money and Dumb Money is. Then I'll explain the terminology of being long or short the market and the implications.

In commodity trading, conventional wisdom has it that commercial and non commercial which are also called large speculators (hedge funds, institutional funds) are always right. The big money really comes from this side. Hence they are Smart Money traders. They trade the futures market. Futures market trades around the world, currencies, commodities, and financials by trading market trends in these areas. The equity market is a different market from the futures.

Ok, let's get back to Smart Money. The retail investor or Dumb Money is considered you and me and we're considered always wrong. This shows you what is going on behind the scenes while you are working at your 9 to 5 job. There is a report that comes out weekly called The Commitment of Traders (COT) report. It started back in 1924. Every Tuesday, the Commitment of Traders reports a breakdown of "open interest" positions within certain classes of stocks. This shows you the direction of the Smart Money for that day. It shows whether they are "long" the market which means they believe it is going up and they add to their positions. Or whether they believe the market is going down and they add short positions. Short selling is selling a security that a seller doesn't own. It's highly risky for a trader to short stocks. What happens is they are betting the market goes down and hope that they can buy the stock at cheaper prices than whatever the present market calls for. Well, every Friday, a weekly version of this report is released. This report is for Futures-Only Commitment of Traders and the Futures-and-Options-Combine Commitment of Traders are released every Friday at 3:30 P.M. Eastern Standard Time. Most experienced traders look at this last report to see if positions are increased or decreased from the previous week. Some traders download the information into a spreadsheet to chart it and place moving average indicators to observe the trends.

When the retailers get overly bullish the Smart Money holds the opposite side and goes short the market and vice versus. It can be fun for the trader, but it is becoming more complicated as we observe more computerized strategies, more people understanding technical analysis, more derivatives in the market, etc.
Presently, we have the Dumb Money being short the market and the Smart Money long. There has not been this many short positions for the Dumb Money since the late 1990's. This is bullish for going forward. When you have the Dumb Money long in the market and Smart Money short, this is bearish. Typically this is how the contrarian theory plays out.

By the time an advance in the market comes to an end the Smart Money will be quite short the market and they take the Dumb Money profits from them when they start selling. It's all controlled by Smart Money. This is how the Smart Money shakes out the weak hands from the Dumb Money. This is also why we have these volatile days. It's just one little secret of the trader. If you'd like to find out what traders are thinking and following, try following some trader forums. Here are a couple I like:

http://www.investorshub.com/boards/board.asp?board_id=1125
http://www.traders-talk.com/mb2/index.php?showforum=2