Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Confidence

By

Maybe it's time to hit the beach...

PrintPRINT
If you've tried the cool new Google Earth application, you'll notice that when you first open it, you begin by looking at North America from way up. From there, you can zoom in to spy on the neighbors, but it always starts with a big-picture view before giving more and more detail.

Humans are hard-wired that way. We best get our bearings by beginning with a wide view and then zooming in.

Most of what I've written about here are the "zoomed in" portions of measures that I follow. Today, though, I'm going to go over the big-picture composite that I always look at first before trying to determine where I think the best risk/reward lies.

The chart below depicts a composite of many of the most reliable measures that I follow. Some are common knowledge, some are proprietary, but the end result is that it gives us one simple, easy-to-use gauge of where certain investors are placing their bets.



The "Smart Money" in this case are investors who have proved themselves to be good market timers. They typically are at their longest near market lows and their shortest near market peaks. When we see these traders very confident of a market rally (when the green line is over the 0.60 threshold), then we should expect higher market prices.

On the other hand is the "Dumb Money", an admittedly crude term given to those investors who are almost invariably on the wrong side of the market when it is about to turn. When that group is confident of a rally (when the red line is above 0.60), then we should be concerned about a market decline.

The green and red arrows on the chart show those times the smart money was bullish and dumb money was bearish (green arrows), as well as those times the smart money was bearish and dumb money bullish (red arrows).

The interesting thing about our current situation is that as of yesterday, they are both above 0.60, meaning both groups are betting on higher prices. Over the past 20 years, such a thing has proved to be rare - it has happened only a handful of times, and all of those are within the past three years.

If the smart money is counting on a rally, but so is the dumb money, then perhaps what we should expect to see is a correction in an uptrend. That would shake out the weak traders, but still eventually reward the strong ones. Indeed, that is what has happened each of the other times...30 days later, the S&P 500 was positive only 7% of the time with an average return of -1.9%, but after 60 days it showed a nice positive return in nearly all cases.

That's pretty much what I'm looking for now. With wrong-way traders quite enamored with the market, it would be unusual to see strong, sustained gains from here. But with the good market timers also betting on higher prices, it would be equally unlikely to see a large decline. Until we see more of a divergence between these groups, I'm not convinced aggressive bulls OR bears will be able to rack up the gains anytime soon.

< Previous
  • 1
Next >
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

PrintPRINT
 
Featured Videos

WHAT'S POPULAR IN THE VILLE