Dumb money is all-in on the stock market’s rally.

But the smart money isn’t playing along.

Overexcited everyday investors are the “dumb money.”

They’ve been driving this market higher. But they’re in trouble.

This group of investors is acting like this rally can’t end. The smart money disagrees.

“Smart money” is made of institutional investors and mutual fund companies. They have access to reports and information that the average investor doesn’t see. They have this access because they’re able to pay through the nose for it. One Bloomberg Terminal (the gold standard for institutional investment data) costs $24,000 a year. And these companies purchase 100s of them.

This advantage has narrowed in recent years. Technology has made good information available to many more people.

But there is still a gap. Overexcited everyday investors often disregard financial data and buy what’s hot.

Here at Winning Investor Daily, we aim to give you everything you need to prosper in investing and in life. We don’t want you to be the dumb money. We want you to know what the smart money is doing.

Today, we’re going to show you how you can be successful. We want you to understand how the dumb money gets in trouble. And then we’ll show you how to avoid their collective fate.

Now’s the time to be careful.

Chart showing the rise of the S&P 500 index futures, and also showing the the commitments of large and small traders. Large traders are bearish, small traders are bullish.

The black line is the price of S&P 500 Index futures. People often use futures to speculate on the price of the S&P 500 Index.

The indicator across the bottom tells us how different groups of futures traders are betting on the S&P 500 Index.

The red line represents small speculators, or the average investor. Their net long position means they are extremely bullish right now.

The blue line is large speculators, the institutional guys. Their net short position means they are bearish.

It is unusual to see such a big difference in their bets on the market.

Extremes like this are often signs that a market is about to see a correction. The S&P 500 Index has shot up so far so fast, we’re seeing nothing but red flags.

The dumb money’s extreme bullishness tells us they’re the ones pushing the market higher. And they are in for a rude awakening.

Overexcited Investors Are Pushing Up the Options Market, Too

The options market is telling us something similar.

Options trading volume is exploding relative to stock volume. Options are a cheaper, more speculative way to bet on the market.

Individual investors saw what happened in 2009.

And they’re betting like crazy on a new secular bull market — a long-term trend that goes up a lot more than it goes down — is coming.

Chart showing the S&P 500 index climbing over the past few weeks, while the number of small traders buying options contracts has skyrocketed.

Traders buy call options on a stock or fund to bet that it will go up.

Traders purchased 12.1 million call option contracts last week.

The last peak we saw was in February — investors bought 7.5 million contracts. That’s when the S&P 500 Index made its record high … Right before we saw a massive sell-off.

This isn’t to say the market will drop by 30% or more in the coming weeks.

It could happen. What we know is that frenzies like this are unsustainable.

For now, be careful with this rally.

Expect the upside momentum to slow and reverse. Stay away from the small, speculative stocks that individual investors are buying up. Stick with stocks in established, proven businesses. Check out our Winning Investor Daily archive for more recommendations in this market.

And when the decline comes, we’ll be here to help you prosper by showing you how to profit from the downside.

Good investing,

Good investing,
John Ross

John Ross

Editor, Apex Profit Alert