Dumb money wrong again?
As you know, investor sentiment is bearish, and this is a bull signal. I am basing this statement on the “dumb money” indicator, which is shown in figure 1, a weekly chart of the SP500. To make such a statement, I would construct a study where we bought the SP500 when the “dumb money” indicator was below a certain level – i.e., showing too many bears — and sold that position when the conditioned no longer existed. Looking at figure 1, I have placed those buy and sell signals on the price bars.
Figure 1. SP500/ weekly
Looking at this small window of the price cycle, we note that the strategy generated 28 unique trades since August, 1990, and this yielded 892 SP500 points. By comparison, buy and hold SP500 yielded 935 points. 25 out of 28 trades were winners, and the average trade lasted 6 weeks. In other words, the strategy was in the market only 15% of the time. Yet, the strategy earned a return almost equal to buy and hold SP500 but with only 15% market exposure. Therefore, when the strategy was in the market, you saw your money appreciate at a greater than 40% annualized rate. This is very high. (Tech Take)