By Michael P. Regan
It’s well known on Wall Street that there is “smart money” and “dumb money,” and often the main difference between the two is simply how much of it you have.
Doug Ramsey, chief investment officer for Leuthold Group Llc in Minneapolis, has a more nuanced way to spot the difference. And the way he looks at it, the divergence between the two is flashing an “unequivocal stock market negative for the next several weeks.”
Ramsey considers traders of options in the Standard & Poor’s 100 Index to be the “smart money.” On the other hand, the habits of the “dumb money” set can be seen in composite trading volumes in all equity options on the Chicago Board Options Exchange.[eap_ad_2]
Looked at individually, both indicators have enough “noise” that they can be ignored, Ramsey wrote in a research note. Combined, however, the two are showing a pattern that could signal trouble for stocks over the next several weeks.
The “smart money” has built up a large position of puts giving the right to sell the S&P 100, while trading in all options on the CBOE has been dominated by calls giving the right to buy, according to Ramsey. The latter is a contrarian indicator because, well, they are “dumb money” after all.
Ramsey combined the two measures into a single ratio. His report, dated July 8, showed that throughout the current bull market and the end of the previous one, there were short-term market declines whenever the ratio dipped below 0.4. At the current 0.3, the ratio represents the “most bearish combination of smart-money caution and dumb-money confidence in 10 years.”
Ramsey told Bloomberg News last week that he expected a 6 to 8 percent retreat in stocks this summer. The dip will eventually turn into a buying opportunity as equities resume gains later in the year, he said.
Does the smart money have it right again this time? Only time will tell so check back in a few weeks.(Bloomberg)[eap_ad_3]