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Smart Money, Dumb Money Confidence Spread

We periodically show the smart/dumb money confidence spread in our Sunday advisory.  Below is an example smart/dumb money spread (blue chart), courtesy of sentimentrader.com, where it shows that about 79% of the dumb money believes in the rally, but only 33% of the smart money (i.e. institutional money managers) believe in the rally. 

 

 

 

Taking a look at this indicator more closely to judge its effectiveness we back test 5 years and mark the extremes of the smart/dumb confidence spread (bottom blue chart) and how it correlates to the S&P 500 index. We can see that when the confidence spread triggers at +0.25 or -0.25 it offers reasonable prediction of either a pull-back or rally, respectively.  However, during the market turmoil and crash in late 2008 through most of 2009 this indicator was less effective and was difficult to read.