With the S&P 500 and Dow Jones Industrial Index hovering around record highs, the imbalance between "smart money" and "dumb money" has widened to comical extremes. Stare too long into that gaping abyss between retail investors and their pro counterparts, and it begins to stare right back.
Exhibit A: Fund managers surveyed by Bank of America Merrill-Lynch last week found that the bank’s big-money clients are net underweight in equities for the first time in four years. The proportion of fund managers hedging against a fall in stocks rose to a record high in the survey’s 8-year history. Asked what the most crowded trade was, more than 35 percent of the respondents answered long on “high-quality” stocks.
So who’s crowding in as mutual funds back off? Bloggers, for one.
Exhibit B: Birinyi Associates’ Ticker Sense poll of online stock-traders found that 63% of participating bloggers were bullish on the S&P last week, the highest measure since 2012. Their exuberance was tempered this week however, with bullishness cooling to 58%.
But that’s still high. The last time the fickle reading came in above 50 for two weeks straight was in March, 2014.
In other words, followers of august trading sites like “Elliott Wave Lives On” and “The Mess That Greenspan Made” have grown uncommonly giddy about the prospects of the S&P, just as mutual fund heavies have tugged at their collars, broken into a flop sweat, and edged away.
The temptation here is to make some dire historical analogy suggesting impending doom. "Tulip bulb contracts showed an identical split in 1637!" "The last time markets acted like this was during the late Cretaceous!" Etc.
For this type of insight one can reliably turn to the Fight Club avatars over at ZeroHedge, who have done the thankless work of predicting the imminent collapse of markets - and western civilization - every day for the last eight years.
This week it’s a chart from Deutsche Bank strategist Jim Bianco, whose measure of S&P 500 price-to-equity ratio over market volatility peaked in 2000, 2007, and today. In the most recent measure, the metric shot up from the “Realistic & Disciplined” region (colored a reassuring periwinkle) to the panic-red “Mania” zone.
Clearly this is worthy of concern. Low volatility indicates complacency, even as corporate valuations continue to outpace their declining earnings. But what it means for the immediate future is anyone’s guess, especially with central banks continuing to provide an unprecedented backstop to markets, as ZeroHedge noted.
And stocks are just acting weird right now. As James Mackintosh at the Wall Street Journal noted Monday, end-times-level geopolitical fear has driven up defensive stocks, like utilities, even as enthusiasm for the current bull run has propped up cyclical stocks that are exposed to economic downturns. The usual tradeoff between the two stock categories - one a hedge against rainy days, the other a bet on sunshine - has given way to a schizophrenic market where everybody wins.
There’s no simple story in all of this. Maybe the most useful takeaway is that neither dumb nor smart money might really be all that useful as a category right now.
On the dumb side, knee-jerk dip-buying has become a standout strategy. An index measuring the potential gain from blindly piling into momentum shifts showed a nearly 30 percent gain for 2016, according to Bloomberg. Score one for blogosphere.
Meanwhile, those vaunted asset managers surveyed by Bank of America have turned in their worst performance since 2003, with just 18 percent of large-cap managers beating the Russell 1000 index in the first half of 2016.
Welcome to 2016, where smart money is as dumb money does.
Owen Davis is a freelance finance reporter whose byline has appeared on International Business Times, The Nation and elsewhere.