MW The 'smart money' investors are buying stocks here, according to this index. It could be an opportunity.

By Joseph Adinolfi

Typically, the 'Smart Money Flow Index' is tightly correlated with the direction of the market. But that relationship has broken down lately.

"Smart money" investors have been buying stocks pretty aggressively lately, even as the market continues to struggle in 2025.

If the recent past is any guide, an indicator known as the "Smart Money Flow Index" might be flashing a market buy signal, said Jim Paulsen, a market veteran and former top strategist at the Leuthold Group, and before that at Wells Fargo's institutional asset management arm.

The index, which is maintained by WallStreetCourrier.com, compares the trading action in the Dow Jones Industrial Average DJIA during two periods - shortly after the opening bell, and during the final hour of the trading day. Using a proprietary formula, the index attempts to compare activity by individual "dumb money" traders and professional "smart money" investors.

Recently, the index has diverged from the performance of the Dow, suggesting that the smart money might be getting back into the market. The discrepancy is unusual, Paulsen said. Typically, the smart-money index is pretty tightly correlated with the direction of the Dow.

The last time the two parted ways - right at the outset of the bull market that began in October 2022 -ended up being a buying opportunity, Paulsen said.

Once again, the historically tight relationship between the two suggests stocks could be poised for another leg higher, Paulsen said.

"Since this bull market began on October 12, 2022, the correlation between the Dow Jones Industrial Average and the Smart Money Flow Index has been a remarkable 0.93," he wrote, in a post on his "Paulsen Perspectives" Substack.

The theory undergirding the indicator is that trades around the open are more likely to be driven by individuals, emotion and short covering. Short covering more often takes place around the open, Paulsen said, pointing to a typical flurry of activity driven by investors forced to buy back shares to close positions that moved against them.

By contrast, sophisticated traders with stronger informational advantages often wait until the end of the day to place their orders.

"The Smart Money Flow Index is essentially the difference between what smart money is doing each day less what dumb money is doing," Paulsen said in his Substack post.

Data published by trading desks at Goldman Sachs Group and elsewhere indicate sophisticated investors like hedge funds have spurned stocks recently. Flows on retail traders, meanwhile, indicate aggressive buying during every dip.

See: Newer investors have been rewarded for buying market dips. That won't last forever.

U.S. stocks finished the week lower on Thursday, with the S&P 500 SPX, Dow Jones Industrial Average and the Nasdaq Composite COMP all booking weekly losses, FactSet data showed.

That added to the market's troubles in 2025. The S&P 500 has fallen 10.2% since the start of the year, while the Nasdaq Composite has fallen by 15.7%. The Dow is 8% lower.

U.S. equity trading was closed on Friday for the Good Friday holiday.

See: Is the stock market open today? Are banks closed?

-Joseph Adinolfi

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April 18, 2025 12:23 ET (16:23 GMT)

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