‘Dumb money’ FOMO’ing the rally as expected

Market sentiment is much different today than it was in June

Any self respecting sentiment rally would need to flip formerly over-bearish refugees and get them lusting for stocks once again. In looking at the ‘dumb money’ aggregate, that appears to be what is happening now.


Smart/Dumb money confidence, from sentimentrader.com

Back at the June sentiment lows we noted how this and other sentiment indicators were stretched over-bearish nearly to the degree of the depths of the 2020 COVID crash. That event was also unsustainable.

Today casino patrons are emboldening, on cue. The classic setup is for a bull trap and a massive whipsaw for these knee jerkers. But I have also seen times when I rightly projected sentiment rallies that I thought would be terminal, but instead kept on going. Never underestimate a greedy bull when she’s got the bit in her mouth. FOMO + MOMO = maybe not what the bears would hope for.

Anyway, here is a look at NAAIM’s investment managers eating the rally right along with the dumb money above. This reading is as of August 10.


Ma and Pa, you ask? Well, AAII is eating the rally, but Ma and Pa tend to be more disciplined than the boyz above managing other peoples’ money. Ma and Pa manage their own money. Hence, a more muted response as they try not to chase too much.

As for the newsletter writer community (Investors Intelligence), the bearishness was actually more acute than the 2020 crash low and so you can see the power built into this sentiment rally. The newsletter boyz were springing back hard as of August 9, but could have more recovery to go before the rally ends.

II bull/bear ratio from Yardeni.com

Bottom Line

Personally, I have seen this movie before. In that movie I call a rally while the average casino patron is hiding under a rock, swearing off the stock market forever. Then the rally persists… and persists… and persists. Then at some point casino patrons are happily back to normal, expecting stocks to go up forever. I have in the past aborted such rally situations too soon, even after calling for the bullish phase to the sound of crickets among casino patrons. Then I watch the FOMOs and MOMOs drive the mess ever higher.

So I am going to stay aware of those experiences while at the same time adhering to NFTRH’s original plans for the rally and its end point. I rag on we TAs a lot, but there are clear levels at which it’s still just a bear rally as originally planned. But there are also clear levels that would strongly call that notion into question. As yet, it’s still just a bear rally but I’ll keep an open mind due to the history of my experiences. Never underestimate the greedy momentum of the bulls and what it is capable of.

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This Post Has 9 Comments

  1. MikeC

    I am one of those hiding under a rock. When I step out, i usually get swatted.

    This past week has been tough watching everything go up and being 72% in cash. At least it’s now getting over 2%

    1. Gary

      Your cash levels are lower than mine. And do you know what? I don’t have even a single impulse about FOMO’ing. I am very conservative and will take the payout on the cash and trade around 20% to 30% +/- in this market. Only when I find the next opportunity to establish a NEW trend will I commit more. The stock market is played out IMO. FOMOs are rushing back in. Yeah, I wanna get me some of that. <

  • MikeC

    I am looking at the smart money / dumb money chart. I know I still have to get my head wrapped around the whole macro thing, but if we look back post Covid crash, the dumb money rocketed up and meandered at a high level for a long time, at least until summer of 2021. While in that whole period the “smart” money dropped and stayed low. At https://sentimentrader.com/dumb-money, the term dumb is referred to as trend following money

    So I want to ask the usefulness/significance of this chart? What are you trying to read from this chart? It seems to generally just be the market itself at an exaggerated scale to me. With the smart money an exaggerated inverse. If I look at late 2020, dumb is way high, smart is way low, and the uptrend just kept on.

    The dumb money is following the trends. Whether they get out at the right times is a good question However, the dumb money may have lost money from Jan 2022 to June 2022, 4800 to 3600, but then they’ve also successfully navigated back up to almost 4300.

    I am still ahead of them, having gotten out of most everything in January, but my concern is being swept up not in the FOMO but whatever the related acronym is of sitting on the sidelines because that crash back down is right, just, almost, around the corner…! (Maybe this: FOJI: Fear of joining in)

    I know your job is to figure out if we continue up or slide back down. I certainly can’t divine that!

    The bottom line question here is am I understanding the nature and usefulness of this chart.

    1. Mr.P

      The “nature and usefulness of this chart” is it is one among many data points to consider when making buy and sell decisions. Regarding “dumb money rocketed up and meandered at a high level” during the post-covid-crash rally, that is / was one data point among many, the more important data points at that time were long-dated Treasury yields were around 1% and the Fed and USG were flooding the nation, indeed the world, with a tsunami of debt and fiat.

      The rally currently underway is not the be-all end-all rally for all eternity. There will be others ad infinitum. You missed the opportunity to enter the market in June and July relatively “safely” when risk vs reward was extremely favorable. Friendly advice: let it go and work on making sure you don’t miss the next bottom.

      Personally, I love to see frantic buying into the close on a Friday after months of rally, as it affords an excellent low risk, high reward opportunity to initiate shorts. Which I did.

      All the best to you.

      1. MikeC

        I totally understand the reasoning here, I do. Really.

        And I know this rally may continue another 200 points, or turn south Monday, or go to 6000.

        That’s the fundamental issue I constantly have with myself. The future is unknowable. You can feed 18 different inputs into a computer, or Gary, or me, or 100 other analysts and get 100 different answers on what the market is going to do next week, next month, next year.

        I know longer term, it generally shouldn’t matter, whatever longer term is nowadays. What we are experiencing now may look like little blips along an up an to the right path for the next 50 years.

        Or we could also in some universe drop hard and go sideways for 20 years like Japan.

        Time to look at annuities again… :-)

  • Barden

    @ Mike C. “getting swatted” —my sentiments exactly.
    It seems that any forays into these farcical “markets” are still casino bets however logical the macro or other data they are based on. If you’re lucky, the odds might be similar to blackjack rather than roulette.

  • Dave W.

    A comment, followed by a question.

    My weakness is risk management and not imposing my own will on the market. IMO, this is one of NFTRH’s greatest strengths. Right up there is the management of multiple, dynamic, inter-playing indicators. So, my goal (aside from outpacing inflation) is to learn risk management by allowing Gary to lead in that arena. It’s taken much longer than I’m willing to admit, but I am learning a whole lot about my weaknesses and how to control them (in other words, to actually put to practice what I’m paying for. Lol).

    Question: I know we are keeping open minds that the bottom might be in (but probably not). It seems a massive amount of fear has been driven from the market, thus the possible bottom. So, what are some realistic catalysts that sees the market plumb the depths? My thought on that is this rally goes hot into the Sept. Fed meeting and the eggheads tighter beyond market expectations. Others?

    1. Gary

      Hi Dave, this is going to be covered in tomorrow’s report, which will be in the form of an online post. There is some lecturing in there and a lot of talk about pscyh and sentiment. Also the parameters to the rally and the upcoming FOMC. Let me know if any further questions after reading.

      1. MikeC

        Looking forward to it!

  • Comments are closed.