The question was whether or not the market's moved too far too fast.

Let's watch:

Source:

CNBC

Chart courtesy of SentimenTrader.com.

This study plots the "dumb money confidence," the "smart money confidence" and the spread between the two.  The theory is that smart money will be a buyer during market bottoms a seller into rallies.  Dumb money, on the other hand, will enter the market after most of the gains have already been realized and become bearish after most of the decline has already occurred.  When the two groups diverge significantly from one another it marks an extreme sentiment reading that should be taken as a contrary indicator.

I've highlighted the extreme optimism spread readings since the bull market began in 2009.  As you can see, when the market was momentum-driven in 2010 the extreme optimism reading lasted a considerable length of time.  The extreme optimism readings mostly led to mostly minor corrections (although some of them were monsters).  My point is not to criticize the indicator.  In fact, the indicator nailed the bottom of the markets with great consistency since the beginning of the bull run.  It also nailed most of the tops during the previous bear market.  Obviously the lesson is context.  Yes, we are currently at a sentiment extreme, just within a larger context of a bull market.  The pullbacks are most likely buying opportunities and sentiment will remain optimistic for extended periods.  This is how the market is rolling.  Until it doesn't.  Sure, caution is warranted but don't expect Armageddon around the corner.

This is an amazing indicator and I would highly recommend having Jason Goepfert's research in your trading toolbox.  He's the man when it comes to quantitative analysis of a notoriously hard-to-quantify subject.  An important note about this indicator is that it is calculated using real-money gauges rather than subjective opinion polls.

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LOLZ

Time to play catch-up?  "Since 2000, earnings-per-share have jumped 84%, while the S&P has declined 14."  (Fortune)

Vitaliy: The value trap of deeply cyclical stocks.  (InstitutionalInvestor)

Extreme readings for optimism are all over the place right now.  (DynamicHedge)

Microsoft is now building it's architecture for Android and other non-native environments.  Because they know they've lost.  (BusinessInsider)

Barry looks at how census hiring skews the non farm payrolls report and confuses people.  (TBP)

The greatest performing, hottest stock ever of 2012 so far is the Bank of Motherf***ing America.  What.  (MarketBeat)

Looks like there's a storm brewing in the US repo markets.  (FinanceAddict)

Andrew Ross Sorkin: I'll take the under on that 400 million day users number for Facebook.  (DealBook)

Mark Zuckerberg could be looking at a $2 billion tax hit this year.  (CNNMoney)

Markets bounce to start the year which misleads journalists into printing "comeback" stories like these.  (InvestmentNews)

Watch closely as newspaper and blog media become television studios.  (NYT)

Prepare for the coming of the hybrid hedge fund-mutual fund thingie.  (FinancialPlanning)

Mascot on Mascot violence must stop!  (BleacherReport)

Don't miss my daily linkfest for financial advisors this morning!  (WSJFA)

“We used to rely on the public making dumb investing decisions,” one well-known Manhattan hedge-fund manager told me. “but with the advent of the public leaving the market, it’s just hedge funds trading against hedge funds. At the end of the day, it’s a zero-sum game.” Based on these numbers—too many funds with fewer dollars chasing too few trades—many have predicted a hedge-fund shakeout, and it seems to have started. Over 1,000 funds have closed in the past year and a half.

Sherman points out that there were 600 hedge funds in 1990, ten years later there were 4000.   Now there are almost 10,000, a few thousand more than anyone really has any use for.  The barriers to entry have basically disappeared (raise a million bucks, spend a third of it on admin stuff and you're in the game).  But all of the data says that the bottom half of the industry is starving - virtually all of the flows have been going to the biggest funds out there for a few years now.

When Sherman says that the hedge fund industry is just as overbuilt as the credit and housing markets were, I completely agree.

If you haven't read it yet, go here:

The End of Wall Street As They Knew It (NYMag)

Hat tip Museum of American Finance

I was on the CNBC Fast Money Halftime Report desk today, here's what we had to say about it...

Source:

CNBC

I exorcised all of my demons in the forthcoming book Backstage Wall Street, but today I have a little bonus for you.  There was an item in Registered Rep about how Morgan Stanley and Smith Barney advisors are fiending for their allocation of Facebook shares, the biggest piece of IPO product they've seen in like forever.

I have no idea how these brokers will parcel out the meager amount of shares they get, but if I were a broker, this is how I'd sell Facebook:

Step 1: I'd call all my best clients and tell them I have a limited amount of shares but my manager will only apportion Facebook IPO stock to the largest accounts.  I would then forward them incoming transfer paperwork and tell them they needed to send in their other brokerage accounts to be above level X.

Step 2: I'd call all my midsized accounts and say the same thing.  None of them would be getting any shares but I'd be able to raise a ton of assets with the longshot promise.

Step 3: I'd put my junior broker on the small accounts to do the same thing.  Then I'd have him call all qualified prospective leads morning, noon, and night - the pitch would be something like this:

"Now obviously, when a hot deal like Facebook comes along, the lion's share goes to our biggest and best accounts.  But we always keep a small amount aside for newer clients as a show of good faith that we intend to grow this relationship and look out for you when opportunities arise.  If we can get you any of Facebook - and remember, we're not promising for sure that we can - how would you like your new account to be titled?  Joint, individual or corporate?"

We'd open a slew of new accounts.  The day of the deal, we'd say "The bad news is I couldn't get you any shares of Facebook, we had to take care of exisiting clients first.  The good news is, my analysts just came out with a conviction buy rating on NVidia, ticker symbol NVDA.  Pick up a thousand shares with me today and the next time a hot offering comes along, I promise I'll be able to take care of you."  With that spiel, we'll convert probably 1 out of 5 of those new accounts to an actual trade, cowboy up!

Step 4: I'd go back to the all the other accounts the night before the deal and start breaking up what I was given by the selling group manager, even if it was only 5000 shares.  Literally, everyone would get a hundred shares - that way I could keep everyone happy with the fact that I did my best and at least I came through with something.

Step 5:  The day after the Facebook IPO went public, I'd call all the midsized accounts that didn't send in new assets to qualify, point to the Facebook share price and show them how much money everyone made.  I'd ask for incoming transfers again.

The net result of this would be a few million bucks "new money" raised, the selling concession on the Facebook shares (figure 5% of however much I was given to book) and a slew of new clients opened based on the bait-and-switch pitch my junior broker closed them with.

Tada!  And that's how it's done, folks.

And don't laugh...as we speak there are hundreds (thousands?) of guys doing exactly that right now.  I'm glad to be "reformed"

Get the book if this sort of thing is your bag, baby:

Backstage Wall Street

Read Also:

Fight for Facebook Shares May Be Messy (Registered Rep)