Sentiment is waving the yellow flag

A further rise in Dumb Money Confidence and rapid deterioration in Smart Money Confidence has pushed the spread between them close to -70%, one of the widest in 20 years. The Backtest Engine shows that after 32 out of 33 days with this wide of a spread, the S&P suffered a negative return at some point between 1-8 weeks later. Similarly, more than 50% of our core indicators are showing excessive optimism than are showing pessimism, an extreme spread which has led to a negative expectancy going forward. While breadth and momentum strongly argue for higher prices over a medium- to long-term time frame, when sentiment becomes this eager, shorter-term returns tend to be muted and prone to reversals.