The following strategy comment comes courtesy of Liz Ann Sonders of Charles Schwab:

“As you can see, a yawning 50-point gap opened at year-end between the two measures of confidence, with dumb money optimism having soared, while smart money optimism became decidedly more subdued. The good news is it’s starting to narrow, but this is a potential warning of some market vulnerability, which would likely be necessary to close this gap further.”

Source: Charles Schwab


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  1. Can you define “smart” versus “dumb” money? I checked Liz Sonders article, which led to another source. Neither Sonders or the source website provided definitions, which seem to be necessary for interpretation.

  2. If memory serves me correctly I believe the indicator is calculated by netting the transactions in the first hour of trading and the last hour of trading. The premise is that the smart money transacts in the PM and the dumb money transacts in the AM.

  3. All things considered, dumb money seems to have made out pretty well over the past couple of years.

  4. The market looks vulnerable in the near term but the dumb money has made a pretty good return since inception of the chart even when sentiment peaked now and then.

  5. This is what the “smart money” has been waiting for since March 2009.

    The top shouldn’t be far away now!

  6. How cmes everyone keeps saying the Dumb money did well
    Looks to me like the Dumb money capitulated at almost every major low and was uber bullish at every major high over the time period of that graph?!?
    Thats unlikely a strategy that would have yielded a great return!

  7. I’m up about 100% since March 2009. If this is dumb I’ll take it and you can keep listening to all the “smart” guys like Hussman, Roubini, Rosenberg, Shilling, Cullen et al.

  8. The smart/dumb graph is a “short term” indicator, therefore no need of all this long-term talk. All it is saying is that we should expect a market fall (or at minimum sideways action) until the two indicators converge closer together.

  9. Best I could find quickly:

    “The Smart Money Confidence and Dumb Money Confidence indices are a unique innovation that allows subscribers to see, in one quick glance, what the “good” market timers are doing with their money compared to what the “bad” market timers are doing.

    Our Confidence indices use mainly real-money gauges – there are few opinions involved here.”

    “Examples of some Smart Money indicators include the OEX put/call and open interest ratios, commercial hedger positions in the equity index futures, and the current relationship between stocks and bonds.”

    “Examples of some Dumb Money indicators include the equity-only put/call ratio, the flow into and out of the Rydex series of index mutual funds, and small speculators in equity index futures contracts.”

  10. Can’t tell whether he was talking about you or Michael Cullen, as all names listed seemed to be last names.

  11. Can’t tell whether he was talking about you or Michael Cullen, as all names listed seem to be last names.

  12. “smart” is in quotes. and you should be happy that i listed you in some infamous company! what a rouge’s gallery!

    Ph.D. = Pile it Higher and Deeper.


  13. Are these “smart money experts” the same “experts” who had no way of seeing the economic crisis coming?

    And isn’t Schwab one of the largest retail outfits for the “dumb money”? I mean hell, even I have a Schwab account!

  14. Hmm…this Schwab indicator does look suspiciously like a copy of the one Sentimentrader publishes (which has an excellent track record).

    Sometimes when the indicator get this bullish, the market acts like Wile E Coyote hanging in mid air over a ravine: it seems like it’s never going to fall. In these conditions the dumb money can eke out a few more pennies for a while longer, but those gains are almost always given back sharply once gravity finally takes hold. Even Ben’s helicopter can’t pull the market up in a perfectly straight line!

  15. Liz Sonders, the author of this piece, is mind blowingly gorgeous. I can’t take her chart too seriously though.