What is the Smart Money/dumb money confidence indicator?

The aptly named “Smart Money/Dumb Money” Confidence indicator is one of our favorite measures of investor sentiment. The indicator uses “real money” gauges to track what different groups of investors are actually doing with their money.

What is the difference between “Dumb money” and “Smart Money” Investors?

“Dumb Money” investors are usually poor at market timing and tend to get optimistic toward the end of a market rally. The vast majority of the time, the behavior of the “Smart Money/Dumb Money” investors is simply noise, but when we see the behavior of the two groups diverge sharply in one direction or another, it is something we take notice of.

Is “smart money/dumb money” a caution flag?

“Smart Money/Dumb Money” is one of many technical indicators and we don’t make investment decisions based on one indicator alone, but the huge extreme between the “Smart Money/Dumb Money” confidence is certainly a caution flag in the midst of headlines concerning new market highs.

Do we follow the'smart money'?

They then measure the view of the so-called "dumb money" as determined by smaller, typically more retail investor transactions. They then compare the difference or spread of one versus another. The underlying logic of the study would suggest that we follow the "smart money," especially when it reaches the extremes.