Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Stock Market Rally, What the Smart and Dumb Money is Doing Now

Stock-Markets / Stock Index Trading Sep 18, 2009 - 01:36 AM GMT

By: Q1_Publishing

Stock-Markets

Best Financial Markets Analysis ArticleHerding is when many investors make the same choice based on observations of others, independent of their own knowledge. Markets do tend to have phases when one sentiment becomes dominant. These diversity breakdowns are consistent with booms (everyone acts bullish) and busts (everyone acts bearish).


To the best of my knowledge, there is no one barometer that accurately and consistently measures investor diversity. An objective assessment of public (media) and private opinion probably gives some good clues.

That’s what Michael Mauboussin, Legg Mason’s Chief Investment Strategist, wrote in his sure-to-be-investing-classic book, More Than You Know.

And it’s probably the best explanation of what’s going on in the markets today.

Now though, with the markets showing continued and exceptional strength, we have to wonder whether it’s time to take profits or let our winners ride. To do that, we’ll have to look at some of those “good clues.”

The “Smart” Money

There are all kinds of definitions for smart money. I consider the best tracking of smart money to be the American Association of Individual Investors (AAII) Investor Sentiment Survey.

The survey is made up of the individual market assessments of regular retail investors (like you and me) who are members of AAII. So it’s most likely skewed to investors who watch the markets fairly closely. So if you asked most of the participants in the survey, they’d consider themselves smart money.

Since the survey started, its findings have averaged 39% of investors are bullish, 30% bearish and 31% neutral. A slightly bullish leaning would seem about right for a market which goes up 11% per year over the very, very long run. But the survey results actually reveal a lot about this smart money.

In the first week of March, the AAII survey found bearishness hit an all-time high. Only 19% of investors were bullish and 70% were bearish. The markets went way up.

In mid-August, the survey found 51% of investors were bullish and 33% were bearish. The market went up.

At the end of August, the survey reported 34% of investors were bullish and 48% were bearish. The markets went up.

Last Friday the survey found only 37% of investor were bullish and 44% were bearish. The markets have since gone up.

See a pattern?

I hope so. In every one of these surveys bearish sentiment is above the long run average. Also, the market has gone up shortly afterwards every time.

That’s just a small sampling. They were all taken from a period when the markets only went up. But it gives you a pretty good idea that bullish sentiment is still far from a euphoric high.

The “Dumb” Money

That’s the “smart” money crowd though. There’s also the dumb money which, as you’ll see in a second, is a force to be reckoned with.

I consider the dumb money to be those investors who turn their investment dollars over to mutual fund managers. Now they’re not necessarily dumb people. But the idea of handing over the money to a group of managers who, as a group, failed to beat the markets and still have the gall to charge as much as 2% or 3% for their inadequate services is a pretty dumb move.

Lately, the dumb money has continued to plow money back into the markets.

Last month was an amazing month for the dumb money investors. Morningstar reports $54 billion of new cash was handed over to mutual fund managers.

The strong month brings the six month total mutual fund inflows for the year to $226 billion. That’s an astounding amount of money. And just proves the point, if you throw enough money into something, prices will rise.

This just feeds the bull. The markets are going up and they want in. And they want in big. The markets go up some more and they come rushing in for more.

As we’ve seen time and time again though, the dumb money buys and sells at the worst possible time. In the short-term they’re right. In the long-run, they’re almost always wrong.

One Rule about Calling Bottoms

In the end, the herd is made up of dumb money and smart money. The only real difference is the smart money gets out first.

The important thing here is that it still looks like the herd has not completely jumped on this bull…bear market rally…or whatever you want to call it. When they do, that’s when the herd will be in full force.

That’s why we could be in the early stages of a blow-off top for the markets - which you don’t want to miss – and there’s a rough down leg coming.

Or the economy could be in a true recovery. If you watch GDP numbers, it sure will appear to be. You have to remember though, simply selling a house adds to GDP, although no new wealth is created. So we may be in an official recovery as economic transactions increase, but it may never feel like it to most folks.

No one knows for sure. But we do know one thing. The smart and dumb money will move the markets in one direction. The odds of a flat, ho-hum 10% rise in the markets are low.

My best advice is, don’t fight the market, it will win. Go with it, and you will win.

That’s why I still recommend buying stocks and using trailing stop-losses. That way you’ll be there for a blow-off, “sugar-high” rally and you’ll know when the rally is over because your portfolio will be all cash.

In tomorrow’s Prosperity Dispatch, we’ll look at the simplest way to profit from this market (a small group of folks just used it to make 73% in two weeks) for maximum safety and profit. It’s a different market, but the strategy we will go over is perfectly suited for these conditions.

Good investing,

Andrew Mickey
Chief Investment Strategist, Q1 Publishing

Disclosure: Author currently holds a long position in Silvercorp Metals (SVM), physical silver, and no position in any of the other companies mentioned.

Q1 Publishing is committed to providing investors with well-researched, level-headed, no-nonsense, analysis and investment advice that will allow you to secure enduring wealth and independence.

© 2009 Copyright Q1 Publishing - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Q1 Publishing Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in