Divergence Between Dumb And Smart Money Confidence Is Approaching Record Levels

Tyler Durden's picture

Not to be confused with Bloomberg's Smart Money index, one of the more popular proprietary indicators is Sentiment Trader's Smart Money/Dumb Money confidence index. For those unfamiliar, this is how ST explains this useful market timing metric.

The Smart Money Confidence and Dumb Money Confidence indices are a unique innovation that allows subscribers to see, in one quick glance, what the ‘good’ market timers are doing with their money compared to what ‘bad’ market timers are doing.

 

Our Confidence indices use mostly real-money gauges – there are few opinions involved here.

 

The Confidence Spread subtracts the Dumb Money from the Smart Money. So when the Spread is very high (above 0.25), that means the Smart Money is looking for a rally, and the Dumb Money is looking for a decline; we should expect stocks to rise after those conditions.

 

When the Spread is very low (below -0.25) then the Smart Money is anticipating a decline and the Dumb Money a rally; we should expect stocks to decline after that.

While using a backtested model with these two signals provides some interesting result, the one more notable observation from the creators is that "Dumb Money being more optimistic tends to highlight moves lower in the market." And, as one would expect, vice versa.

So where are the two confidence indicators currently? As the following chart demonstrates, the spread between the "smart" and "dumb" money confidence is about as wide as it has ever been, and perhaps just as notable, the "Smart Money" is at or near the lowest level of "confidence" in recent history despite, or perhaps due to, the S&P just several days ago hitting new all time highs.

To be sure, maybe the recent swoon lower in risk is just a temporary event, and the "Dumb Money" will have the last laugh after all.

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abyssinian's picture

what kind of money Gartman is using? That is the most important information we need to know. 

TradingTroll's picture

He uses auto-dissolving money.

It dissolves when he invests it in a trade.

The_Juggernaut's picture

"Smart" money is anything but.

RagnarDanneskjold's picture

Brexit. The "dumb" money has been winning ever since because it controls the ballot box, and politics is a greater influence on the markets.

OfAllElaboratePlans's picture
OfAllElaboratePlans (not verified) Jan 31, 2017 4:23 PM

All 'money' which circulates (((as currency))), by virtue of the fact that it is actually counterfeitted joobux, is, by nature 'DUMB MONEY'

 

Hey ~ but if you have it on your EBT card, it'll still git u a monthly ration of Cheetos & Grape Drink FOR FREE... So it can't be all that dumb right?

 

Let's frame this another way:

 

- When it all goes 'tits up' ~ Zuckerberg's 'BILLIONS' drop to zero (except for the pineapples he managed to stash in the process ~ which ~ maybe ~ he can hurl at the natives when they gang up & decide to annex his property).

- Brewster's 'MILLIONS' (measured in monthly grams of grape drink & Cheetos) also drop to zero, but he can just steal YOURS at that point. But you probably don't have any, so he'll just cap your ass & move on to your wife.

Rainman's picture

How much fiat are you allowed to lose to hit the smart money category ?

shizzledizzle's picture

So the FED is the RED line?

dude duderson's picture

Dumb Money is actually one of my favorite rappers

trouba z ceska's picture

"dumb money” = wrong at key inflections and turning points

ZeroHedge = wrong 99% of time

silverer's picture

Well, there's some smart, and plenty of dumb.