The Other Side of the Boat

Market sentiment in all its various flavors, while not used by many, can be a very powerful tool providing investors an edge. Retail investors have the odds stacked against them as the professionals and computer algorithms are lurking looking for pockets to pick so tools (like sentiment) can help to level the playing field. Like most indicators they are not always right and as such should be used in conjunction with other tools to confirm price. As a standalone tool I have found the more extreme the reading on sentiment the higher the probability it will follow a contrarian path.  An example is when a sentiment survey show most investors are bullish, the high probability next move will likely be in the other direction. Similar to when everyone is on one side of a boat the safest place to be is on the other.

The chart below from Sentimentrader (which provides some of the best, unbiased sentiment research available) caught my attention and I thought it worthy of reposting. I had not seen their “smart money” measurement before but find it very compelling because it is based upon price movement not the normal secondary effect of other indicators such as momentum.  

Fee only Financial Advisor bay area CFP NAPFA

The data in the chart is pretty self explanatory as it shows the movement of “smart money” and how it has related to tops (and bottoms) in the stock market. Clearly the most recent movement should have the bulls taking pause. This is one more indicator that supports our belief the longer term trend is likely lower, in spite of any strong short-intermediate counter-trend rallies that may occur.  For now it appears as if the smart money has shifted to the other side of the boat.