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.