This piece, posted today on the SafeHaven website, has an interesting look at the ‘dumb money’ indicator…
Until proven otherwise, extremes in the sentiment indicators don’t matter as “this time is different”. I never really believe that “this time is different”, but that’s what I have labeled those instances where prices lifted strongly despite the bullish extremes in sentiment. The current rally has taken on a quality reminiscent of 1995, 1998/ 99, 2003 and 2009. In these instances, it took bulls to make a bull market.
I have pointed out how dysfunctional the price action has been, and it is becoming pointless to anticipate a market correction. On the other hand, investing in a market that refuses to correct is problematic as well. It is a higher wire act without a safety net. It is my belief (guess?) that the correction will come sooner than most expect as market extremes with poor underpinnings (i.e, lagging market breadth) should correct (beyond a couple of percent), but as you know, the market doesn’t care about what I think or do. For now, we must operate under the assumption that “this time is different” until it isn’t.
The “Dumb Money” indicator (see figure 1) looks for extremes in the data from 4 different groups of investors who historically have been wrong on the market: 1) Investors Intelligence; 2) Market Vane; 3) American Association of Individual Investors; and 4) the put call ratio. The “Dumb Money” indicator is very bullish to an extreme degree.