Whatever Happened to the Last Hour of Trading?

What does it mean when traders are buying or selling stocks in the last hour of the day? Some have suggested that this might be a "smart money" indicator, in that institutions that want to position themselves for anticipated moves will do so prior to the close to take advantage of overseas strength or weakness. Another way to view trading in the last hour is as a sentiment gauge. Heavy buying (selling) in the last hour means that bulls (bears) are so convinced of their positions that they're not willing to wait until the next day's open to place their orders.

Yet another view is that buying/selling in the last hour reflects risk-taking (willingness to assume overnight risk), while avoidance of buying/selling reflects risk aversion.

Whatever the explanation, we can see that a cumulative index of price changes in the Dow over the last hour of trading has failed to keep up with the Dow's price advance since the end of 2004. Early in the bull market, traders were buying during the last hour. Since 2005, this has not been the case. Even on Friday and over the past two weeks, when we had a nice pop in the Dow, there was no push to buy in the last hour.

Is smart money avoiding the market? Is sentiment bearish? Are traders behaving in a risk-averse fashion? Perhaps all the above. What we can see for certain is that willingness to step up and buy in the last hour has essentially vanished from this market.