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Is Retail Investor Buying At The Warning Level Yet?

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    June 21, 2013

    I’ve shown you numerous charts over the years of how over the long-term, retail investors tend to buy high, hold on through significant declines, and then sell at the lows, while so-called ‘smart money’ has a history of buying low and selling high.

    Here are two of the more revealing charts:

    The first one, from the Investment Company Institute, shows investor money-flow into and out of equity mutual funds from 1994 through 2008.

    As the chart shows, investors didn’t really become interested in the record-breaking 1990-2000 bull market until about 1996. Then, as they began making money they became excited and increasingly confident, pouring a then record amount in during 1998 and continuing to pour more money in during 1999, the peak year for that bull market. No problem with that.

    But most astonishing was they not only held through the terrible bear market of 2000-2002 but continued to flood still more money in all the way down, while the so-called ‘smart money’ was selling at such a pace that the S&P 500 lost 50% of its value, and the Nasdaq 78% of its value. In fact, investors flooded a record amount into equity mutual funds in 2001, as the market plunged in its worst decline toward its bear market low.

    Only after the bear market had ended and the next bull market had begun, that of 2003-2007, did they begin to pull what was left of their money out of mutual funds.


    They then repeated the pattern in the 2003-2007 bull market, not catching on to what was going on until 2005 and 2006 when they piled into that bull market, and poured a record amount in at the peak of 2007 (that bull market ended in October, 2007). And they continued to pour more money in during 2008, the worst year of the 2007-2009 bear market.

    The next chart, from EPFR Global, picks up the continuing pattern.

    It shows how, well after the current bull market began in early 2009, which was fueled by the buying of institutional investors (pension plans, hedge funds, investment banks, etc.), retail investors, devastated by the 2007-2009 bear market, were pulling money out of stocks and mutual funds, and continued to do so until late last year.


    And now for the first five months of this year retail investors finally have confidence that the bull market that began in 2009 is real, and have been flooding money into the market in record amounts.

    The Investment Company Institute reported recently that young investors, those who began investing in the last ten years, in some pretty scary times for the stock market, were less willing to take financial risks until last year, 2012. But last year, 62% of investors in their 20’s had 80% or more of their 401K holdings in equities, compared to only 48% invested as aggressively in 2007.

    And here’s what the American Association of Individual Investors says about the current asset allocations of its members: “Equity allocations nearly hit a six-year high last month. . . . Cash allocations, meanwhile, fell to a level not seen since 2010. . . . Stock and stock fund allocations rose 3.5 percentage points to 65.2%. . . . . This was the largest allocation to equities since September 2007.” [A month before the 2007 top].

    And here is a chart, courtesy of Doug Short (Advisor Perspectives) and Lance Roberts, CEO of Streettalk Advisors, that we’ve been showing our subscribers in the Premium Content area, that adds a second perspective to margin debt.

    It analyzes margin debt (which is at a new record high) in a larger context that includes free cash accounts and credit balances left in margin accounts for further margin buying. It shows the risk when margin buyers have already used up much of the credit in their margin accounts. (The slightest market decline can result in margin calls for more cash that they don’t have, forcing all that margin buying to quickly reverse to selling to close out the positions).

    And in April it had fallen to lows similar to those at the serious market tops in 2000 and 2007. (The blue line is the S&P 500).

    Click to View

    And then there is the report we caught on Business Insiders yesterday that “Bank of America Merrill Lynch reported inflows of money into U.S. equities by their private customers last week were the largest since January, their third consecutive week of buying, while hedge funds were net sellers for the second consecutive week”.

    So it is a legitimate question to ask if retail investor confidence in relation to what so-called ‘smart money’ is doing, has reached a level yet that would warn that a market top might be near?

    Bernanke did it again.

    Who else, with just a few dozen words, can instantly cause $trillions to come out of, or flow back into, global stock, bond, and currency markets?

    Who else can cause such movements merely on rumors of what he might say?

    Who else can convince investors and the media that only what he says about QE is of any importance to the U.S. market, that the direction of earnings, the condition and direction of the economy, global market collapses, etc. are of no importance?

    Only Ben Bernanke.

    Meanwhile, whether deliberate or by accident, the confusion in what he has been saying and hinting at since May has certainly created volatility.

    Of the 19 trading days since Bernanke’s testimony before Congress on May 22, when he first mentioned the possibility of dialing back QE, there have been only 6 days that did not close with the Dow either up or down triple-digits. Seven have been to the downside, six to the upside. As of yesterday’s close it was a string of 7 straight triple-digit days, 4 to the downside, 3 to the upside.

    How long can he continue his amazing balancing act?

    To read my weekend newspaper column click here:  What If The Secular Bear Market Is Not Over- 

    Subscribers to Street Smart Report: The new issue of the newsletter from Tuesday is in your secure area of the Street Smart Report website.

    Images: Flickr (licence attribution)

    About The Author


    Sy Harding publishes the financial website Street Smart Report Online and a free daily Internet blog at Sy’s Free Blog. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!

    It includes our research and analysis on the economy and markets, and provides charts and buy and sell signals on the major market indexes, sectors, bonds, gold, individual stocks and etf’s, including short-sales and ‘inverse’ etf’s.

    It provides two model portfolios as guides. One is based on ourSeasonal Timing Strategy, one on our Market-Timing Strategy.

    In depth updates are provided every Wednesday, with interim ‘hotline’ updates every time we make a trade. An 8-page traditional newsletter Street Smart Report is provided on the website every 3 weeks, in pdf format for viewing or printing out.

    There is the Street Smart School of online technical analysis ‘seminars’,commentaries to keep you ‘street smart’ about Wall Street, and much more.