There are all kinds of indicators and metrics in the stock market that assist traders and investors.
Don’t Be The Dumb Money
One type of indicator in the stock market is known as the “contrarian signal”. This is a market indicator which indicates the opposite of what one might intuitively conclude from the signal itself.
One such stock market indicator is the “dumb money confidence index”. For better or for worse, it is generally regarded that institutional and hedge fund investors are smarter than individual retail investors.
Consequently, individual retail investors are known as “dumb money”.
The theory behind confidence indicators is that if everyone is bullish and/or confident, then all of the people who could be buying securities in the stock market are already in the market. That suggests that the market is closer to a top.
The reverse is also true. If everyone is bearish and/or not confident, then all of the people who could be selling securities in the stock market have already sold out of the market. That suggests that the market is closer to a bottom.
The chart below is a contrarian indicator.
Don’t be the dumb money. | Source: SentimentTrader
A regular survey of the stock market’s smart money currently shows that only 31% are confident in the state of the stock market, while the dumb money has 79% confidence.
This can be interpreted to mean that the dumb money, or the retail investor, doesn’t realize that the stock market is close to a top.
The Stock Market is Insanely Expensive
This is supported by the Shiller price-to-earnings ratio, which is an inflation-adjusted metric that shows the stock market is presently at its second most expensive valuation in history.