You can see the latest spread below, which is heavily biased toward dumb money optimism.
Dumb Money Much More Optimistic Than Smart Money
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Source: SentimenTrader.com, as of November 12, 201.
If you compare similarly large gaps of excessive "dumb money" optimism over "smart money" to the S&P 500's action, you see these wide spreads have typically been met with a corrective phase. Again, it would be good to see this gap narrowed a bit as a result of last week's correction.
But there's a nice caveat to these troubling sentiment readings at present: If they were accompanied by weak technical conditions or equity mutual fund flows that were equally frothy, my concern would be more elevated.
Equity fund flows only recently turned back up
According to The Leuthold Group, there have now been five consecutive weeks of net inflows into US-focus equity funds. This is the longest stretch since the nine-week run from March into early May of this year (just before the stock market corrected). Before you get alarmed that this is yet another sign of frothy sentiment, do note that there has still been nearly $53 billion in net outflows so far this year.
Equity Fund Flows React to Market's Rally
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Source: The Leuthold Group, as of November 10, 2010.
Breadth thrust and recovery gaining traction
On the technical front, the market had gotten a little overbought, but market breadth (advancing stocks relative to declining stocks) remains in healthy territory. This suggests the correction is (was?) likely to be relatively shallow.
The market remains in "breadth thrust" territory, a technical indicator created by my former boss Marty Zweig, and perfected by Ned Davis Research. A "breadth thrust buy signal" occurs when the 10-day total of advancing issues is more than 1.9 times the 10-day total of declining issues. NDR uses the Value Line 1700 stock composite because it's broader than the S&P 500. See more in the chart below.
Breadth Thrust Remains in Play
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Source: NDR, as of November 12, 2010.
As you can see in the accompanying table below, historically, the best returns for the market have come when the market is experiencing a breadth thrust.
| Thrust indicator | Value line composite annualized gain |
| On a sell | -12.9% |
| Neutral | 4.0% |
| On a buy | 22.9% |
Source: NDR, March 10, 1964 to November 12, 2010.
