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Minyan Mailbag: What's so Smart about the 'Smart' Money?

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priviledge over prowess...

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Bennet,

We haven't met or spoken but I wanted to write and say I'm enjoying your posts. Yours was a nice piece this morning.

I like the focus on the CoT data with a focus on the flow between specs and hedgers/dealers. One thing that might make sense, from an educational standpoint on MV, is to emphasize that the reason the commercials act as 'smart' money doesn't have as much to do with outright intelligence or foresight about the markets, but simply derives from their roles as middlemen who accommodate client flow and therefore end up taking outsized positions when the public/speculator community is leaning far in one direction or the other. (I think Succo would be among the first to argue that the dealer community in financial futures aren't inherently brilliant about their positioning in the markets.)

The obvious analogy is the NYSE specialist, who was always considered the 'smart' money. As a guy from an Italian neighborhood on Long Island who grew up with more than one such floor guy, I think I'm permitted to say it isn't the specialists' penetrating smarts that made them act as an indicator of smart money activity, but simply their privileged spot as facilitators of trading flow that almost by definition means they buy low and sell high (and vice versa) for their own account. OTC dealers, of course, don't quite enjoy the monopoly look at the order book that specialists traditionally have, but they do act as a natural counterparty to one-sided demand nonetheless. (Note that Jason Goepfert has done good work on why the specialist short ratio, etc., has lost its efficacy, but the principle of the point stands.)

Anyway, just thought I'd fling those thoughts out there.

Best-

Minyan Michael Santoli

Mike,

I totally agree, which is obviously why I follow so closely. Yes, the specialists seem to "be playing poker, being able to see all of the whole world's hands!" Many people feel as if the large specs (mostly hedge funds) are wrong all the time. Clearly that is not true as there are many GREAT hedge fund managers out there. But as the ranks have grown from 2,000 to 8,000 since I started my first fund in 1998, the quality certainly has been deteriorating, so I will go with the smart money hedgers most of the time.

The other interesting thing is that hedge funds tend to 'travel in a pack' and exacerbate moves in markets, which is important to me once a support or resistance level is broken. Also, it is a well known fact that floor traders in the pits know where stops are centered and they LOVE to 'run the stops.' In this case, all the momentum, for the time-being is one-sided. And thank you for the kind words on my contributions to the Ville. I am glad people find it useful.

Bennet

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