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Smart vs. Dumb Money

Smart Money vs. Dumb Money

While this sounds very crude, this indicator is accurate. What this is a reflection of is the confidence level of two distinct sets of traders in the equity markets. The "smart money" is large institutional traders or commercial hedgers that trade very large blocks of stocks. The "dumb money" is the small, odd-lot traders.  Based on the attached chart (provided by SentimentTrader.com) we have seen a tremendous surge in confidence in the Dumb Money Index and a consequent pullback in the Smart Money Index. Using history as a guide when these two indicators cross and converge it is normally a contrarian indicator of current market action. Thus do not be surprised for a near-term pullback. While no indicator is perfect this is a real-time indicator of sentiment.

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