Dumb Money confidence up, Smart Money confidence down: Time to sell?

Below is a chart, courtesy of www.sentimentrader.com, representing the optimism levels of “Smart Money”—that is, sophisticated traders such as commercial hedgers, institutional managers etc – vs. “Dumb Money” optimism – mainly small traders and mutual fund buyers. The theory, which I’ve found is fairly accurate, suggests that when Smart and Dumb money are simultaneously at extreme views in optimism (or pessimism)- this gives us a heads up for major market movements. I covered this indicator as one of my major market timing factors in my August 26th blog.

 

As noted on my August 26th blog—Smart/Dumb Money sentiment – and other factors – had moved into a bullish scenario. That gave us a heads up that a buying opportunity would come soon. I felt a likely bottom for the market would take place at or near the end of September. It did.

 

Smart dumb $

 

Back in April, I used this same indicator and the others noted in August on a  blog called Storms a’ comin’. April’s blog  noted a bearish Smart/Dumb Money sentiment reading in March, along with bearish readings on the other indicators that I follow- here is the blog from April

 

What is this indicator telling us now?

 

Right now, Smart/Dumb Money sentiment is neutral. Sentimentrader’s indicator shows us that Smart Money is returning to “neutral” confidence (falling)- while Dumb Money also moves into “neutral” territory (climbing). In other words, levels are no longer extremely bullish, as they were in August, or extremely bearish, as they were in March/April. I drew arrows on sentimentrader’s chart above showing what happened during periods where Smart Money confidence declined to neutral  from optimistic, while Dumb Money confidence grew to neutral from pessimistic. As you will see, this occurrence, at least in the past few years (and further back too, although chart detail gets too hard to read on a longer chart) typically signals reasonably bullish conditions.

 

So—this, and other factors, suggest that the market remains a reasonably safe bet for the time being. Times change though. I’ll keep posting my two cents worth as markets give us the signals in the coming weeks and months.

 

Keith speaking at the MoneyShow Saturday October 31, 2015 at 3:30pm

Please come out and join me – I really enjoy meeting readers of this blog at my speaking engagements. Here is the link for the details

10 Comments

  • Keith your analysis is fantastic. You have kept me in the game when others are saying this is a head fake rally.

    Reply
    • Thanks–and Sebastian–do your friends & family a favor they will benefit from for the long term–send them our twitter handle (@Valuetrend) and a link to this blog / share it so they will be able to follow us and get updates too.
      They’ll have you to thank for the introduction to the blog.
      You may wonder why I do it–its to spread the word on TA, and to spread the word via our own results to prove that TA works. And hopefully, the odd reader may even want to contact us for their investment management. Either way–I love writing the blog – and the more participation, the better!

      Reply
  • Morning Keith …Thank you for your blog. I’m a long time reader of your blog and books, I’m curious as to what % you are at with your cash.
    Mostly I have used VTI for a lot of my us$ investment as well TXN and MSFT. Im thinking we may be close to selling again.
    Thanks again…..take care…roy

    Reply
    • We are only 10% cash now Roy–actually, we went from 52% cash in the final week of September to only 5% cash by the first week of October–then sold one 5% position last week to bring us back to 10% cash. I expect to deploy the last of the cash in the next week or so.My target is 2130 on the S&P500, and I will have to assess if that level will present a selling point again, or if stocks will be held through it. Seasonals are strong over the winter, but that lid in the 2100+ area is pretty significant.
      For now–eat, drink and be merry as the saying goes

      Reply
  • Please justify your bullishness.The market let go when the confidence was at these levels. We have a debt-based fiat currency. This rally has been a liquidity fueled rally brought on by the treasury paying down its debt because of the debt ceiling. When it is lifted and they replenish their cash it will go the other way. Small caps are not participating as much. There is a gap at 1950. Support levels have been broken even lower. This rally has been coincident with the decline of yen and the Euro both of which are now oversold.

    Reply
    • Bert–there is nothing to justify. I am a technical analyst. A trader. I buy and trade with the trend. I will buy and sell on signals. If you follow a theme like “debt will destroy the economy” or whatever – you become paralyzed by that theme and will not make money. I buy and sell according to chart patterns and trends. Sure–the debt situation may cause a crash. Fine–I will be selling as moving averages are cracked, and highs and lows reverse. I remain bullish for as long as the charts remain bullish. My bullishness isn’t a theme. Its a trade, and its an obvious one at this time. I am allowed to change my mind to bearish the minute my signals tell me to. I’m not married to anything. I really don’t care what markets do–I am agnostic. I will trade whatever it shows me to trade.
      But in the meantime, our portfolio is now at all time highs, and we expect to continue trading upside until it ends. Then, I will rotate to cash, short, hedge–whatever. Why pre-suppose something will happen in the future, when all you have is “now”? Trading on a concept or theme for a potential future event with undetermined timing is non-profitable proposition. Go with the flow.
      Lose the theme Bert–you cant make money in a theme. Trade by the charts.

      Reply
  • Hello Keith. Thank you for this chart, it gives me confidence in maintaining my position for another 1 or 2 weeks on the TSX rally. I have learned a lot from your blog on technical and seasonal analysis as well as from Don Vialoux and Brooke Thackray.
    What happened to Valeant Pharma and other pharma stocks did not surprise me. Valeant has been rallying up from Oct 2011 at $36 to $347 Aug 2015 and did a pattern of 3 upward bumps. You know something is going to happen sooner or later. A fund manager came on BNN this week upset at the events that has taken place. Perhaps if these fund managers learn about technical analysis they would know nothing can keep going up parabolicly forever. Something always triggers a downfall.

    Reply
    • Yes–TA often refers to what Valeant was doing as a “parabolic” rise–they always end–the extent of the pullback is determined by the fundamentals. Case in point–we own Disney–it went parabolic last year and early this year, we knew it had to pull back, but the fundamentals are fine for DIS. So the pullback was not considered a problem–and in fact supported the stock giving it cause for a quick rebound after that healthy expected pullback–hence its current strength. Nonetheless, we decided that if DIS broke the low set in August (prior low) we would sell. That is how discipline works. DIS didn’t break, we still own it. Valenat also went parabolic, but its become obvious the fundamentals are questionable. So the break back in the fall was ‘real”.
      BTW–another way TA was helping us avoid this stuff–I was on BNN in September and noted its broken trendline–I recommended a sell at that time.

      Reply
  • Seasonality it looks good to go for the S&P. But wouldn’t it be wise to wait for it to get above 2135 and hold there for a week or so before committing money. Looks to be pretty strong resistance there.

    Reply
    • I agree with your target–although I bought back in the first few days of October (and advised on this blog to do so on the doji candle of Sept 30).
      See my blog today Dave–I talk about that target, and some potential rotation.

      Reply

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