Thread: Smart vs. Dumb Money

Originally Posted by tsptalk

Per www.sentimentrader.com:

... large commercial hedgers (aka the "smart money") moved to yet another record net long position of $29 billion, while small spectators (the "dumb money") moved down to $11 billion, one of their smallest net long positions in years.

I saw this article called ARE INVESTORS UNDERINVESTED? by Jeff Goepfert at Minyanville this morning after I finally completely bailed to the sidelines, been thinking about it off and on all day. Sorry I'm not sure how to post the website address as an active link, and I don't know what I'm doing with the upload feature either. I'm an ultra newbie at web page stuff.

Anyway he suggests the ratio between $ in money market vs. $ in the market vs same in 2000 suggests market is not oversold and that maybe either things aren't as bad as they seem to be going or a lot of people haven't freaked out badly enough yet. After reading, I got to wondering if this balance is the smart money/dumb money divide, and whether the greater amount not on the sidelines means there is still a lot of dumb money yet to bail out, or whether this is all the smart money sticking it out and/or already come back into the market, or a mixture on both sides? Comments anyone? I'm sure there must be a variety of opinion.

Originally Posted by alevin

Sorry I'm not sure how to post the website address as an active link, and I don't know what I'm doing with the upload feature either. I'm an ultra newbie at web page stuff.

http://www.minyanville.com/articles/index/a/15506

Interesting article. The Mutual Fund Cash levels have been bearish for a few years now. This link is almost 2 years old, but it gives a longer time frame than Minyanville.

http://bigpicture.typepad.com/commen..._funds_ca.html

I wonder if the popularity of automatic asset builders (a monthly fixed contribution amount), Index Funds and Money Market funds have anything to do with the disparity. The amount of investors going at it alone is higher now than it was from 1960-1980 due to the advent of the internet. Also, what about Hedge Funds? They control 2 trillion US dollars in the world market place.

Looks like it may be an indicator of market tops, but don't hold your breath.

Can Their Wish Be the Market’s Command?
By BEN STEIN
Published: January 27, 2008

The losses in the stock market since the highs of October 2007 are about 14 percent. This predicts — very roughly — a fall in corporate profits of roughly 14 percent. Yet there has never been a decline of quite that size for even one year in the postwar United States, and never more than two years of declining profits before they regained their previous peak.

In other words, traders are sending stocks down by a fantastically larger amount than is warranted by a recession or the losses in subprime. How and why does it happen? As someone said in the movie: “Forget it, Jake. It’s Chinatown.” It’s just Chinatown in trader-land, where money is made and there is no perspective.

So when you see the market gyrating wildly downward and hear some pundit saying it’s because of this or that data or this paradigm or that ratio, remember trader realism. The traders move the market any way they want, any way they think they can make money, and then they whisper a reason to journalists later in the day. Then the journalists print it or say it on television, and the amateurs believe it.
...And the traders snicker.

I just thought this article was interesting. Another writer said this was Stein's reaction to place blame on his recent losses in the market. I personally don't think much of Stein's opinions any more than the rest of the so-called market "Gurus".

http://www.nytimes.com/2008/01/27/business/27every.html?pagewanted=1&_r=1&sq=Ben%20STein&st=n yt&scp=1

Not sure where this best fits...

A tidbit of wisdom, perhaps relevant for many of us here, and for today's market! (see link below for more, or run a Google on Keynes/Keynesian):

Keynesian Insight: 72 years ago Keynes observed that speculation had come to dominate true investing. In today's hyper-active trading environment, Keynes' lament rings all the more true. Finding a balance between focusing on long-term investing and capitalizing on short-term opportunities -- while controlling emotions -- is vital to successful investing.
http://safehaven.com/article-9467.htm
VR

The theories about smart / dumb money have been around forever. Has anyone made any money trading them?

I don't trade stictly based on sentiment, but I find it the most reliable of all groups of indicators. After all, fear and greed are what move markets.

Originally Posted by tsptalk

I don't trade stictly based on sentiment, but I find it the most reliable of all groups of indicators. After all, fear and greed are what move markets.

My Main Fear is that I'm not GREEDY ENUFF!!!!

Crazy Times ! Before the Credit Crisis, anything above 50 or 60 in the VIX
was considered Bullish (if I remember correctly). We now have a new way
of looking at fear. Its called "The Sky's the Limit Index". We'll remember
this year for many more to come.

Originally Posted by james_smith

The theories about smart / dumb money have been around forever. Has anyone made any money trading them?

Yes, but the game has changed as the leverage which has flooded the market in the past 20+ years is slip sliding away.

Sentiment indicators have been pretty useless throughout the entire 2008 but as far as I'm concerned, 1 year is the short run. I'll continue to stick with extreme sentiment readings as my top indicator of market conditions.

Da boyz are at work again.

http://zerohedge.blogspot.com/2009/0...s-goldman.html

the ability of people (like you and I) to see the fact that a handful of banks, most specifically Goldman Sachs, constitute the majority of NYSE trading volume - and they're trading for their own book, not for customers, will no longer be disclosed.
This "back and forth trade" between a handful of institutions is nothing more than the old "pump and dump" game that has been played in the OTC market forever - and almost always screws the individual investor.
This is no different than you and I selling a house back and forth between us repeatedly, each time at a higher price. We both appear to be geniuses as we're both making a "profit", right?
Well, no. One of us is destined to take a horrifying loss if we do not find a sucker to make the final transaction with.
The embedded scam is that real gains require real parties at interest and not a closed system of a couple of guys passing an asset back and forth in a transparent attempt to "bait" someone else into becoming the sucker to offload that asset to.
The parallels to the housing bubble are not coincidence. There is no "value" being created nor is there any actual value appreciation taking place when people pass an asset back and forth at ever-higher prices. Only when there are lots of parties participating on their own, organically, does a market truly exist and does value align with price. Otherwise the so-called "price" is nothing other than a cheap parlor trick.
Zerohedge has been documenting this game now for months as Goldman in particular has come to represent an outrageously large percentage of the entire NYSE volume.
The problem of course is that, at least on paper, market manipulation, irrespective of what form of parlor trick you choose to use, is a serious violation of the law. Of course these violations of the law have been ignored for so long that nobody seems to care any more, but the fact remains that should the public come to believe that the NYSE has turned into nothing more than a gigantic pump-and-dump scheme operated by a handful of banks trading between themselves with publicly-guaranteed funds the consequences could be catastrophic.

[Karl is commenting on today's post by Zerohedge. NYSE responded to Zerohedge already.
http://market-ticker.denninger.net/

Let's see. That means GS or one of its program-trade competitors is going to be left holding the bag when the rug gets pulled and the house of cards disintegrates. Will probably take everyone else along with who's still in at that point. At what point does the market become SO corrupt that us little guys stop participating and pull our funds out, whatever's left of them? THAT will be THE bottom of the market cycle. Hmm. Well, guess I'll leave my current chips on the table in brokerage accounts and let them ride for now since I'm already in. TSP, still waiting for the bull market to appear, or for the next intermediate drop, whichever comes first.