The "Dumb Money" indicator is shown in figure 1. The "Dumb Money" indicator looks for extremes in the data from 4 different groups of investors who historically have been wrong on the market: 1) Investor Intelligence; 2) Market Vane; 3) American Association of Individual Investors; and 4) the put call ratio.
Figure 1. "Dumb Money" Indicator/ weekly
I would apply 3 interpretations or scenarios to the current extreme readings in investor sentiment:
1) This is a bull market, and as we know, it takes bulls to make a bull market. Extremes in investor sentiment - just like over bought signals - are irrelevant.
2) Even though prices may be higher over time, the market is likely to consolidate (i.e., trade in a range) over the next couple of weeks; referring back to figure 1 and the 2003 time period, we note that the market actually went sideways for about 13 weeks following the extremely extreme extremes in investor sentiment. I suspect that this will be the most likely scenario for now. There will be a bid under the market. It will be tough to short or bet against this market for the foreseeable future.
3) The last scenario is that the current extremes in investor sentiment will mark the price highs in the major indices leading to the mother of all fake outs. This scenario is still very much on the table, but with an expected bid below the market, I don't see the market making a sudden reversal anytime soon. Market tops are a drawn out affair!
In sum, the bulls remain in control, and despite the bullish extremes in investor sentiment, it will likely be some time before the market rolls over. There may be a lot of believers, and in general, this is not good for higher prices, but these buyers won't give up so easily. As I am not one to chase prices higher, I would still wait for a more risk adjusted entry.
The "Smart Money" indicator is shown in figure 2. The "smart money" indicator is a composite of the following data: 1) public to specialist short ratio; 2) specialist short to total short ratio; 3) SP100 option traders. The "smart money" is neutral.
Figure 2. "Smart Money" Indicator/ weekly