The following is a reply by a Canadian trainer (sorry, don't have the name) made in another discussion about Smith squats. He seems to agree with you:
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"First, there is no clinical evidence or research data whether published or not, of which I am aware (which of course may simply mean I haven't come across it yet) that would lead one to conclude (according to the accepted statistical methods for the treatment of data to establish a correlation or causal relationship) that squats performed on a Smith-machine apparatus pose any inherent danger to either the knees or the spine when performed correctly. If anyone can offer such evidence I would greatly (and sincerely) appreciate him or her sharing it, or letting me know where I can acquire it. Alternatively I would also be interested in discussing any Biomechanical models that he or she may have used to arrive at this conclusion. Anecdotal accounts, opinion, and conjecture, regardless of the source or the forum, do not constitute evidence.
Second, I would like to point out that if performing a squat on a Smith-machine is to be classified as an "unnatural" movement that the body was "not designed for" (and I refrain from getting into the implications of that phrase because I don't care to open a debate over evolution versus creation) then this classification must also be applied to virtually every other Strength Training movement existent. There is very little that is "natural" about the majority of movements that Strength Athletes utilize in the pursuit of their training in so far as they do not occur outside of the training environment. The argument within this context against the Smith-machine squat of course tends to focus specifically on the fact that the bar (or load) is restricted to a path of motion that is linear. Its detractors argue that the "natural" motion produced by movement of the body' s limbs is rotational and that the two are therefore incompatible. This argument is completely erroneous because it fails to consider that regardless of the path through which the load is moved, the motion of the limbs about the axes of the joints remains rotational in nature. This is because the limbs are not capable in general of active linear motion (though one portion of the body may be moved passively through space on a linear path it is as a result of rotational motion occurring about the axis of another joint e.g. the forearm and hand may be pulled directly towards the body on a linear path via rotation at the elbow and shoulder). Muscle complexes are activated to produce linear forces that act on bones via connective tissue. The linear muscle forces are translated into angular torque by the lever systems formed through the articulation of the bones, and expressed as rotational movement (provided there is a net unbalanced force present) of the limbs about the joint axes. Several of these rotational movements can then be combined and coordinated to produce a variety of external movements both linear and rotational in nature. The squat for example (whether using a barbell or a Smith-machine) is a combination of rotational movement at the ankle, knee, and hip joints, with minimal spinal deflection at the articulation with the pelvis. The nature of the final overt movement that is expressed in no way alters the rotational nature of the movement of the limbs about the joint axes that combine to produce it.
Third, I would like to emphasize that the performance of ANY Strength Training movement without strict adherence to proper form is inherently dangerous; and that the degree of risk is in direct proportion to the load, and the percentage of momentary volitional ability (your maximum capacity to perform) that is applied. I will not dispute that a proportionally high number of people who have at some point included Smith-machine squats in their training program have experienced a variety of injuries ranging from minor to catastrophic, and that low back discomfort or strain is a common complaint because that has been my experience as well. However, I have never encountered an instance where the injury or discomfort was not preventable or correctable. The vast majority of people get into trouble because they do not understand how to perform the movement properly, and virtually all of them make one or all of the following three mistakes.
By far the most common error, and the source of most complaints about back strain, is that of allowing the pelvis to travel too far to the rear as the trainee descends towards the bottom of the exercise stroke such that the anterior angle between the floor and the vertical axis of the trunk is greatly decreased. The mechanical effect of this is the same as that of leaning too far forward when squatting with a barbell in as much as the moment arm (perpendicular distance between the applied force vector [in this case that of gravity acting vertically downward on the bar] and the axis of rotation) in the lever system consisting of the spinal column, the pelvis, and their articulation is greatly increased, which multiplies the resulting torque acting about the joint axis. This amplified torque must not only be overcome in order to reverse the motion of the bar and execute the positive phase of the exercise stroke, but must also be continuously matched in order to maintain proper spinal alignment. Though there is nothing inherently wrong with bending forward at the waist while under load (as in a stiff legged deadlift, hyperextension, or good-morning) the loads typically utilized when squatting are far beyond the abilities of most people to safely handle in this way. Few trainees posses the strength and control in the muscles of their lower backs to produce sufficient force and to maintain it without any interruption for long enough to fatigue their leg and hip extensors in this fashion. The squat (barbell or otherwise) should always be performed while keeping the torso as vertical as possible. If you are unable to descend into a full squat without leaning forward excessively (especially on the machine) then you need to work on ankle flexibility rather than cheat by leaning further forward.
The next most common mistake (and this applies to barbell squats, and just about every other exercise as well) is loading the bar with a weight that far exceeds your ability to perform the movement properly. Now I'm not speaking of occasionally challenging yourself with an extra 5 or 10 lbs, but of trying to push a weight so large you have no option but to cheat and use momentum from the first repetition. Most people who are having trouble with Smith- squats will find that some (if not all) of their problems can be alleviated simply by reducing the load to the point where they are able to regain control of it. Most of us know first hand the dangers of using a load that is beyond our abilities, and those that don't will learn one way or another, and probably sooner than later. A good test to see if the weight is too heavy is to ask yourself if someone were to suddenly yell stop at any point throughout the range of motion of any movement would you be able to comply immediately. If you could not then the load is too heavy for you to control safely.
The third mistake, which is often coupled with the second, is that of moving too rapidly through the transition between the negative and positive stroke, i.e. bouncing out of the bottom. The problem (briefly because it is a topic unto itself) is that the impact forces which occur in that instant when the motion changes from negative to positive can be far in excess of the stabilizing forces that hold the joint together (the force of the muscles on the joint and surrounding tissues, hydrostatic pressure within the joint, and all of the resulting action/reaction force couples) even when combined with the stretch reflex that occurs, such that the excess kinetic energy is transferred to the joint structure itself where it momentarily becomes stored potential energy (assuming the tissues can withstand the force and do not simply snap or tear). Though the release of this stored potential energy from the joint does allow you to push more weight out of the bottom position it can also contribute greatly to both acute and chronic knee injuries (just as is would with barbell squats). You should always move slowly and under control, particularly when approaching a maximum load or you are asking for injuries regardless of what movement you are performing.
There are a host of other smaller mistakes, many of which are related to an individuals biomechanical configuration or just plain sloppy lifting habits such as foot placement, pelvic tilt and yaw, hip alignment, shoulder position, the placement of the bar across the upper back, body segment and limb proportions, proper breathing, etc. that can also have an effect on how comfortable (relatively speaking) a trainee will be when performing the movement. Most of these however, are easily correctable when recognized, but require a certain amount of experience to pick up on.
The bottom line is that the Smith-machine squat does not pose any inherent dangers to either the knees or the spinal column provided it is performed correctly, and no one to my knowledge has ever proven otherwise either in theory or through clinical trials (though "expert" opinions abound); but I invite anyone to do so if they can. However if you do not adhere to proper form when performing this or ANY other exercise you will in all likelihood encounter problems. The Smith machine has long been a viable alternative for those who wish to perform squats and pressing movements at or near the upper limits of their abilities with safety and confidence at times when a capable spotter or a power rack is not available. It has also served well those who are attempting to learn such movements but do not yet possess the balance to feel confident even within a good sturdy power rack. I realize that this post is not likely to change many opinions, most people will continue to believe as they do simply because they want to. In all likelihood most will simply dismiss it as "too technical" or just a bunch of "pseudo-science". About this I harbor no delusions. Perhaps however it will cause a few to think beyond what they have heard at the gym, or read in their favorite muscle-comic."