Smart Money Indicator Verification Update

“Verification Tests of the Smart Money Indicator” performs tests of ideas and setup features described in “Smart Money Indicator for Stocks vs. Bonds”. The Smart Money Indicator (SMI) is a complicated variable that exploits differences in futures and options positions in the S&P 500 Index, U.S. Treasury bonds and 10-year U.S. Treasury notes between institutional investors (smart money) and retail investors (dumb money) as published in Commodity Futures Trading Commission Commitments of Traders (COT) reports. Since findings for some variations in that test are attractive, we add two further robustness tests:

• Extend the sample period in “Verification Tests of the Smart Money Indicator” through the end of March 2020 to see how SMI performs during the 2019 coronavirus (COVID-19) stock market crash.
• Using the same setup as in “Verification Tests of the Smart Money Indicator”, test alternate definitions of commercial traders as smart money and non-commercial traders as dumb money (from legacy reports), rather than asset manager/institutional traders and non-reportables, respectively (from more granular disaggregated reports).

Using COT report data, dividend-adjusted SPDR S&P 500 (SPY) as a proxy for a stock market total return index, 3-month Treasury bill (T-bill) yield as return on cash (Cash) and dividend-adjusted iShares 20+ Year Treasury Bond (TLT) as a proxy for government bonds during 6/16/06 through 4/3/20, we find that:

(more…)