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A favorable development in Smart Money versus Dumb Money

Jay Kaeppel
2026-09-22
The Smart Money/Dumb Money Confidence Spread is an important sentiment indicator. In this note, we test a systematic approach in Backtest Engine 2.0 using a recently triggered entry signal with exit criteria added.

Key points:

  • Our Smart Money/Dumb Money Confidence Spread indicator measures the relative state of sentiment between two important groups of traders
  • The indicator recently moved from a significantly negative reading to back above 0
  • This generally flashes a green light for stocks in the short term
  • In this note, we add some exit criteria and test the signals generated by this approach in Backtest Engine 2.0

Smart Money / Dumb Money: What you need to know

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 "bad" market timers are doing.

Our Confidence indices use mostly real-money gauges - there are few opinions involved here. Generally, we want to follow the Smart Money traders when they reach an extreme - we want to bet on a market rally when they are confident of rising prices, and we want to be short (or in cash) when they are expecting a market decline. The higher the confidence number, the more aggressively we should be looking for higher prices.

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.

In contrast to the Smart M

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Risk Disclosure: The information and tools provided are for research and analytical purposes only and are not intended as investment advice. Market analysis involves uncertainty, and outcomes may differ from expectations. Users should conduct their own due diligence and consider their individual circumstances before making any financial decisions. Past performance is not necessarily indicative of future results.

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