92% SHORT, which is basically almost FULL SHORT
Good column at link belowShiny Happy People: Investors Cheering Stocks’ New Highs
Options Traders at Optimistic Extreme
Source: Charles Schwab, Bloomberg, as of 11/15/2019.Smart vs. dumb money
Finally, one of my favorite sentiment indicators—and one of the most popular ones I show in my writings or in client presentations—is constructed by SentimenTrader (ST) on a daily basis. The Smart Money and Dumb Money Confidence indices are a unique innovation that show what the “good” market timers are doing with their money compared to what “bad” market timers are doing.
ST’s Confidence indices use mostly real-time gauges—there are few opinions involved in them. Generally, you want to follow the Smart Money traders when they reach an extreme and do the opposite of what the Dumb Money traders are doing when they are at an extreme.
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. Examples of some Dumb Money indicators include the equity-only put/call ratio (like shown above), the flow into and out of the Rydex series of index mutual funds, and small speculators in equity index futures contracts.
Because the “dumb money” follows trends, and the “smart money” generally goes against trends, the “dumb money” is usually correct during the meat of the trend. However, when it becomes too positive, and sentiment has reached an extreme, stocks typically run into trouble. That has historically typically happened when Dumb Money Confidence rose above 60% and Smart Money Confidence has fallen below 40%.
Well, see below. Clearly, we are at one of those historical extremes. As of Friday, the five-day average of the Smart Money/Dumb Money Confidence spread has moved below -60%. In the past decade, this happened on 55 days, leading to further gains for the S&P 500 over the next two months after only 20 of them (a low 36% “win rate”), with a median return of -3.0%.
“Dumb Money” & “Smart Money” at Opposite Extremes
Source: Charles Schwab, SentimenTrader, as of 11/15/2019.In sum
For the past near-two years we have been pointing out the confluence of uncertainties that have meant the market could “go either way”—including most obviously trade/tariffs, but also the related economic trajectory, Fed policy and geopolitical/political uncertainty. It has led to a wide trading range—the peaks and valleys of which have been driven as much by extremes in sentiment as they have by the changing dynamics of the underlying fundamentals. In light of that, and the extremes of sentiment we are witnessing again, investors should not view the market’s latest high with rose-colored glasses.