Technical analyst and market expert Norman Fosback has attempted to quantify "smart money" as a relationship of trading volume behavior, in that dumb money follows the crowd (large volume) while smart money quietly accumulates positions when no one is watching (low volume).
While I in no way discount Mr. Fosback's methodologies, an investor has to be careful about using volume as a sole barometer for price forecasting. Volume is simply the number of shares (or contracts) traded during a specified time frame and will not provide a picture of the tug-of-war between bulls and bears : for that, you would have to look at the price chart, which is why technical analysts always examine price first and look for volume trends as a confirmation tool. Therefore, the context of volume is dependent on price. Simply seeing large volume is not a "good" or "bad" phenomenon, since the largest of volume typically occurs during market crashes and panic selling.
There are other granular details that could be addressed about this or any number of technical methodologies that purport to guide us to the smart money path, but the one concept that I believe is the most important is agility. This is not about being quick on the trigger : it's leveraging situational awareness so that you don't have to.
An excellent example of this is the mainstream media : it's a behemoth that spreads its tentacles to every corner of the Earth. To be on the mainstream is a prestige that carries a stiff premium of both acceptability and expectation. Often, the two are diametrically opposed to one another. In my opinion, smart money would never be caught in this torrential headwind.
Money magazine, which is run under the Time Inc. News Group banner, released their "Investor's Guide 2014" issue around mid-November to December. It is chock-full of stock picks and investment ideas, but one segment called "Catch the Wave" caught my eye. The headlining statement read, "Our stock columnist picks five firms on the leading edge of innovation. Just know the ride can be rough."
For those that bought into the ideas, the ride certainly has been rough! Of the five innovative companies that are featured, only two of them have posted gains since publication. An impassioned plea was made for all companies listed, but the results have been volatile, with the winners taking on sizable gains and some of the losers are deep into the red.
The stock picks are naturally from the majors, with each company boasting market capitalization in excess of $1 billion. Money magazine certainly hit a high note in terms of acceptability (marketability) by focusing on companies with high value and proven earnings performance. However, what they failed to account for was expectation : with these companies operating at peak levels, is it reasonable to expect appreciable gains?
So far, the smart money is saying no. They want to leverage the strength of acceptability OR expectation, not both. Such pairings often don't lead to favorable results and ultimately, if an investment doesn't have a high enough probability of profitability, there's no point in engaging it...especially if the probability is inherently dampened by infrastructure.