Smart Money/Dumb Money [December]

Generally, we want to follow the Smart Money traders – we want to bet on a market rally when they are confident of rising prices, and we want to be short (or in cash) when they are expecting a market decline. We also call this measure the "Buy Confidence" indicator - it tells us how much confidence we should have in buying the market. Examples of some Smart Money indicators include the OEX put/call and open interest ratios, commercial hedger positions in the equity index futures, and the current relationship between stocks and bonds. In contrast to the Smart Money, we want to do the opposite of what the Dumb Money is doing. These traders have proven themselves over history to be terrible at market timing. They get very bullish after a market rally, and bearish after a market fall. By the time the majority of them catch on to a trend, it’s too late – the trend is about to reverse. That's why we call this the "Sell Confidence" indicator too, as it tells us how confident we should be in selling the market. Examples of some Dumb Money indicators include the equity-only put/call ratio, the flow into and out of the Rydex series of index mutual funds, and small speculators in equity index futures contracts. [HT zerohedge and sentimenttrader]

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Smart Money/Dumb Money [December]

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