The "smart" money and the "dumb" money are both getting worried.  Is this good?

When I talk about sentiment and contrarian thinking, I know I lose some of you.  Particularly the newer readers that hear it for the first time.  In a nutshell, the more people think the market is going to go up, the less likely it will.  The more people that that think the market is going to go down, the less likely it will go down.  So if you ask 100 random investors if they think the market is going to be higher or lower in six months, and 70% say they think it is going to go higher (the bulls), it is more likely to not go higher.  Or it will go down before it goes higher.  But they'll be bearish by then.

To take it a step further, there is "smart" money and "dumb" money.  Dumb money is the herd of investors as a whole.  We are part of that herd.  Then there is the smart money.  These are sophisticated traders and investors who trade for a living or manage institutional investment funds.  When the smart people are bearish  (think the market is going to go down) or bullish (think the market is going to go up) I pay attention.  When the dumb money (or herd) is extremely bearish or bullish, I like to do the opposite.  It is uncanny how accurate this dumb money indicator is.

Currently the dumb money is leaning toward the bullish side, but only slightly.  As I mentioned last week, of those polled 36% said they were bullish, and 30% bearish.  When those numbers are equal or the bears overtake the bulls, that means there are too many bears and it is actually very bullish for the market.  36/30 is getting close even which would be bullish for the market.

Now take a look at the smart money poll below. the "Fearless Forecaster" survey.  Only 22% of this group are currently bullish, or believe the market is going to go up, while 61% are bearish, or believe it is going to go down.  Just few weeks ago there were 79% bulls and the market rallied for three weeks.  Now they are as bearish as they have been in over a year. 



                                              Chart provided courtesy of www.decisionpoint.com

So, the smart money is very bearish and the dumb money is getting close to being too bearish.  What will the market do?  If I had to guess, and that is not worth much since I am part of the dumb money, I would say we get more of a pullback.  A quick fairly nerve-wracking pullback that will scare the dumb money into becoming very bearish (bullish for the market) and the smart money will quickly turn bullish and start buying their fear.  That's how I'm playing it.  I am being very defensive here and will watch for signs that the pullback is over by checking the chart support levels and these sentiment surveys.

I better stop here.  My head is spinning.  I can only imagine what I did to yours.