By John Del Vecchio and Brad Lamensdorf
While market sentiment has hit extremes, it’s mostly the “dumb” Money that is feeling giddy and greedy.
On the following chart, the red dots highlight periods of excessive optimism among the Dumb Money crowd versus the Smart Money crowd.
While there have been a couple of periods of strong momentum that carried the market higher despite over-enthusiasm by the Dumb Money group (no one is wrong all of the time), most periods are characterized by falling or stalling markets.
We have now hit just the thirteenth signal this century.
These extreme levels are reached about 10% of the time.
While the returns are positive, they are just 1/10th of the performance when the situation is reversed. When Smart Money is bullish and Dumb Money is bearish, the annualized return is 61.7%.
Of course, this is a rare occurrence and something we see just 5% of the time.
After a solid start for the year, the excessive reading of this indicator suggests that the market digesting the move or a pullback is highly probable.
It’s time to tighten stops or consider hedges.
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Originally Posted February 13, 2023 – The “Dumb” Money is Ecstatic
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