...but you can see Dumb money remains elevated and tends to sell at the trough while Smart Money is sidelined and tends to buy at the trough. Smart Money is waiting for the next dip. Dumb Money is starting to capitulate and probably needs to go below the top dash line.
The "dumb money" has been pretty smart lately. To a record degree, actually.
Dumb Money Confidence is a model that incorporates more than a dozen indicators that have a track record of cycling to extremes, and equating with ebbs and flows in sentiment among broad categories of investors.
We update this publicly every month, and the chart shows that it closed February at a very high level.
The term "dumb money" is pejorative and we never intended it that way. It just kind of stuck when we started computing it more than 20 years ago. For the most part, these indicators reflect retail, mom-and-pop types of traders, but certainly not exclusively. Sophisticated institutional investors have just as much propensity to suffer from group-think as everyone else, so determining "smart" and "dumb" is not necessarily straightforward.
The term "dumb" itself needs to be clarified. A more accurate description would simply be "trend-following." Most trend-followers are not dumb - they're positioned correctly during the meats of most major trends. That sounds pretty smart.
Where this term gets its meaning is that because trend-followers use different methodologies, some waiting until trends are well-established, by the time most trend-followers hop on a trend, and most aggressively, is about the time the trend is becoming exhausted. So these traders tend to be the most net long near peaks and least net long (or most net short) near bottoms. Because most investors follow trends to some degree, these indicators tend to capture the behavior of most of the money flowing into and out of markets.
At the same time that these traders are showing aggressively optimistic behavior, Smart Money Confidence in a rally has plunged.
It has been a struggle for stocks to sustain large gains when we see a Smart Money / Dumb Money spread like this.
We also update a Market Sentiment overview publicly each month, showing how investors are positioned across various markets. This is showing that as of the end of February, investors were heavily optimistic about stocks and several commodities. That is highly correlated to their pessimism in bonds and the U.S. dollar.
