This is what one would expect from the "smart money" - lower prices bringing out more bulls. The "smart money" refers to those investors and traders who make their living in the markets. Supposedly they are in the know, and we should follow their every move. 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. See figure 1, a weekly chart of the S&P500, for the "Smart Money" indicator, which is only moderately bullish. As the November, 2008 lows are approached, this is the most bullish reading for the "smart money" in 18 weeks.

Figure 1. "Smart Money"

Figure 2, a weekly chart of the S&P500, is the "Dumb Money" indicator. The "dumb money" 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 2. "Dumb Money"

The "dumb money" is neutral on the markets, and they have been that way for 11 consecutive weeks. Over this time period, I have contended that higher prices were not likely unless sentiment became more bearish. This remains the most likely scenario as we need lower prices to convert more bulls to bears.

As mentioned last week, the NASDAQ 100 bares watching as a the price action in this index remains constructive despite the lackluster sentiment picture. There is precedent (as in 1995), although the evidence is scant, for higher prices that is embraced by the "dumb money". Typically, the "dumb money" is sitting on the side lines when the markets start to move higher.

In the end, the "smart money" is starting to warm up to the idea of lower prices while the "dumb money" remains neutral. From a sentiment perspective, there really is no edge. Last week's dismal showing did bring out more bulls in both camps.