Smart money has left the room

Smart money / Dumb money confidence spread is something that tracks. “Smart” investors are those who tend to make better buy/sell decisions at market extremes. They include large sophisticated institutions like pensions and commercial hedgers, insiders and other better informed investors. “Dumb” investors, according to this study, are those who reach the highest levels of confidence at inopportune key market turning points—that is, they are most bullish at tops and most bearish at bottoms. Dumb money includes unsophisticated investors – the indicator focuses on retail mutual fund investor moneyflow (in and out of equity funds), small traders, and small speculators. Subscribers to sentimentrader can watch each group independently, or as a spread. The formula to calculate the confidence spread (differential)  is:


Smart money % confidence level – Dumb money % confidence level = confidence spread.


A spread reading of below -0.25 implies not enough confidence by the smarties. It also implies the dummies are buying stocks hand over fist. This is the level where sentimentrader suggests we pay close attention, as the potential for a market top is increasing. The current level of Smart/Dumb confidence spread sits well below the minimum warning level suggested by sentimentrader – as at April 25th, the spread sat at -0.50.

Smart dumb combined

I’ve drawn arrows on the chart above showing similar occurrences- that is, when the spread approached -0.5 or so.  You can see it has been as often a leading indicator as it has been a coincident indicator. A long gap occurred after a 1st quarter signal in 2015, where markets didn’t correct until the 3rd quarter of that year. This was one of the signals that inspired me to raise cash last March- but it was a long wait before that move was proven prudent.  Also note the two circled zones – which indicate that the spread was unfavorable through much of 2009 and 2013. Both of those years saw strong bull trends. So, as with most indicators, this one should not be used alone or thought of as the panacea of market timing indicators. It can be wrong. Its track record is, however, good enough to pay close attention to in conjunction with other indicators.


Combining the Smart/Dumb confidence spread with pending seasonal weakness, potentially expensive valuations and pending overhead technical resistance (2135), the market may be presenting unfavorable risk vs. return potential right now. As Technical Analysts, we don’t time the markets – we simply measure potential risk vs. potential return. Remember, risk and return are always present—stocks can go up in a high risk environment. Stocks can fall in a low risk scenario. We’re only dealing with odds – not with absolutes.  I might suggest that the odds are less favorable for greater upside in the coming weeks, while the odds for a retracement to the January lows, or lower, are becoming more favorable. That said, anything can happen.


Happy trading!


  • Hi Keith,
    A very timely blog about the current risks, given my situation.
    As you have pointed out in your book, Sideways, a number of technical analysts focus their work on the stages of the economic cycle. Following mostly an Elliott Wave strategy, I have strived to organize my portfolio during the past few months with equities that are expected to do well during the later stages of the economic cycle. Thus I have tended to be overweight materials and industrials, while also increasing my energy exposure. I had reduced exposure to, but retained significant underweight positions in, financials, technology and health care (as these sectors were deemed to be lagging). Regionally, I have tended to be overweight Canada and US and quite underweight Japan, Europe and Emerging markets. I have used mostly ETF’s to establish my positions with stock picking where this was not feasible. My portfolio has appreciated well during the past few months. I have raised some cash with profits and am now more overweight cash given my typical preference to remain invested through sector rotation. Two questions: First, have I assessed the Elliott wave phases accurately enough for this market period with the sector selections that I described? Secondly, At times like these where risks are high, I have used “portfolio insurance” but never with great success. I have used the inverse ETF’s (HIU and HIX) but have found the timing to get in and out of these problematic for me. I have read several of your blog discussions on the HUV. Of the 3 ETF’s mentioned, which if any, would you recommend given the portfolio description above? I was wondering as well if you have any other suggestions on the factors to be considered by the retail investor in deciding on the amount of insurance to buy as a percentage of a portfolio.
    I am most appreciative of the ongoing investor education that you provide.

    • Hi Joe–I tend to do 3 things when I hunker down against risk:
      -raise cash
      -lower beta
      -sometimes I hedge

      The correct way to do it is a matter of opinion. I am 35% cash, 10% higher beta stocks (tech), 40% lower beta stocks, 5% commodity, 10% hedge. The hedge consists of half inverse, half VIX ETF’s.
      The hedge is viewed by us as a way to offset some, but not all of, the potential downside of my stocks–particularly the higher beta ones. The VIX is a play of probability (ie the VIX rarely stays at one end of the spectrum for too long–my bet is for a rise in VIX in the nearterm). However, it is higher in risk–the longer it takes for VIX to spike, the more I lose in contango. I’d recommend most retail investors dont play this.

      But the inverse are a great way of holding your favorite stocks, especially if they have capital gains you don’t want to pay tax on, and still offset risk. Inverse ETF’s will offset growth on a portion of the stocks you hold, but that’s the price of insurance–you effectively cancel out the upside–but in doing that you also cancel downside proportionately–assuming the stocks have market beta.

      • Hi Keith,
        Thanks for your comments. I am still mulling over when or if to buy an inverse ETF. However, in Light of your comments, I have thoroughly analyzed my holdings with respect to their beta. My broker typically gives 3 year averages for beta (where the data is available). Do you use the standard definition — “higher beta” as stocks that have beta greater than 1 and “lower beta” less than 1? Also, have you included your 5% commodities as part of the higher beta stocks or do you keep a separate category for commodities all together due to their typically extreme beta.
        Thanks again,

        • Higher beta is > 1.0, lower beta is below 1.0 as you note. 3 year beta is standard, sometimes you will find exchanges that will report 5 year beta

          I don’t include the commodities as part of the higher beta at this point although I have in the past – they could be argued as higher beta holdings-but I look at them as a semi-hedge or somewhat negative correlated asset right now—this is because they appear to be acting to some extent like counter-stock trend investments–at least for the near term.

    • Well, as I have noted on both BNN and through these blogs–the indicators I look at are about probabilities, not absolutes. Even when right, their fault lies in their forward looking nature. Case in point–last year in March we had:
      -Dow INDU/TRAN divergence
      -Smart/Dumb money at similar levels to today
      -Declining breadth
      -Overbought momentum, overbought New hi/low and % over various MA indicators
      -low vix
      -low put/call

      All of these showed in March. I raised cash. The market went on to new highs by May. Nothing happened beyond up/down narrow volatility in June or July. It was frustrating. I had mud on my face.The host on BNN kept questioning me live on air about that big cash position i had held for months and months to no benefit, and to a certain level of detriment.
      Then…along came August. DOWN went the market –I still had my cash. The final washout after a brief rally in September provided opportunity for me to spend that cash in October.

      I spell this out because I want you to note just how long it took for these indicators to prove valid.
      Also-don’t forget that things can change. They could be wrong. Further, some of the indicators such as INDU/TRAN are not signalling bearish any more.

      Thanks for the faith, but I am not a guru–I simply read the tea leaves as best I can and then like you–hope I am right!

  • Keith..thanks for the update . as usual you are spot on and i have gone to a large cash position and have just started a position in shorting the tsx and s&p…because of your tutoring i believe we are becoming better investors…so, thanks from the western part of the country and keep up the good work…

  • Hi Keith,
    I too have observed the technical indicator warning signs that you have mentioned as well as the negative seasonal and market cycle factors. The risks are high and reward is low so I effectively moved to a net-neutral portfolio at the beginning of April (took profits, raised cash, and hedged). I have been waiting for sell signals to go short the market throughout April and did get a sell signal confirmation for the Nasdaq recently. Though the set-up and potential exists, I don’t yet see the confirmation signals to actually go short the S&P or TSX. I was wondering if you are seeing outright sell signals in these markets?

    (I don’t actually short but use inverse or double inverse ETF’s for this instead).

    Also, I am a bit perplexed with the sentiment indicators, with a lot of them indicating extreme risk while the breadth related ones indicating continued strength. It’s kind of getting weirder every day. I view sentiment as risk signals but not exact timing, so i am putting more weight on the technical indicators and playing it cautious. Any thoughts on the mixed sentiment signals?

    • Well, you always get mixed signals–that’s part of what makes this game a giant intellectual puzzle.
      Also–I totally agree–its getting weirder every day.
      i Just looked at some fundamental stats–this is an historically overpriced market –some fundamental factors not seen more than a few times in history. I’m going to quote a couple of them in a blog this week.


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