◐ Behavioral
◆ The Pattern"Smart money" (institutions, insiders) tends to buy during fear and sell during euphoria.
Smart Money vs. Dumb Money — the persistent pattern of institutional (informed) and retail (uninformed) behavior.
Tracking tools:
• COT Report: Commitment of Traders — shows positioning of commercials (hedgers) vs. speculators
• Insider buying/selling: Corporate insiders buy ahead of good news
• Put/Call ratio: Retail buys calls at tops, puts at bottoms
• Fund flows: Record mutual fund inflows → market tops. Record outflows → bottoms
• COT Report: Commitment of Traders — shows positioning of commercials (hedgers) vs. speculators
• Insider buying/selling: Corporate insiders buy ahead of good news
• Put/Call ratio: Retail buys calls at tops, puts at bottoms
• Fund flows: Record mutual fund inflows → market tops. Record outflows → bottoms
The key insight: smart money acts before the move; dumb money reacts after the move is largely complete.
Pattern bridge: The information asymmetry between sophisticated and retail traders. In ML, KL divergence measures the gap between what one model knows and another doesn’t. In statistics, it’s the difference between the prior and the posterior.