Authored by Nicholas Colas via ConvergEx,
Are retail investors buttressing US stocks at current (and elevated) levels? A variety of indicators say “Yes”. For example, online retail brokerage firms are reporting better trading volumes, investor confidence and portfolio positioning. Also, US based Google searches for a variety of investment-based queries are at levels not seen at any point in this decade. Lastly, mutual fund/ETF flows remain robust, especially for US equities. Given that academic work analyzing retail investor trading patterns shows they tend to cluster in a herd-like fashion and essentially “Trade today’s news”, is all this a problem? The answer here is also “Yes”.
Our primary concern: fund flows can be quite seasonal, with Q1-to-early Q2 a peak period due to retirement account flows. After mid-April, this diminishes considerably. Then, we will need a reliable stream of positive headlines to keep retail investors in the game.
“Alexa – do you work for the CIA?”
That question has been causing all kinds of hilarity on the Internet over the last 10 days. Alexa isn’t the star of the latest “Homeland” style TV show; she is the voice of Amazon’s wireless Echo speaker and home assistant. Plug in the speaker, hook it up to the Internet and your Amazon account, and you can ask her to tell you about the weather and latest news, perform simple information searches, and play music. If your home has internet-enabled devices like thermostats and lights, Alexa can control those too.
With the recent news that the Central Intelligence Agency may know how to hack such devices, Alexa users began wondering where her loyalties really lie. So they asked… And Alexa was less than forthcoming – Amazon said that it was a glitch and they’ve since recoded the device to say “I work for Amazon”.
Now this is funny #Vault7 #CiA http://pic.twitter.com/UOURLGiY9x
— Local Business Cons (@localbusinessco) March 8, 2017
I don’t have an Echo, but if I did I would want to know the answer to one question: “Alexa, should I buy US stocks today?” Chances are good I would get an “I’m sorry Nick, I’m afraid I can’t do that.” After all, giving investment advice is a lot more regulated than selling books or streaming music.
But there are other ways to assess the engagement levels of retail investors in US stocks at the moment. This is, after all, the question of the hour. With equity valuations as high as they are and little progress in Washington DC on the Trump economic agenda, the general consensus is that retail investors are propping up US equity markets even as the “Smart money” heads for the hills.
But is it true? Here are some indicators to consider:
#1 – Google Search Trends (BULLISH). Alexa won’t help you invest, but Google will at least point you in the right direction for more information. Google Trends – the search engine’s analytical tool that shows how many users key in a specific search – reveals the following:
- Searches for “Buy Stock” are at record levels for the period of 2010 – present among US users. Funny enough, so is the search term “Sell stocks”, but the interest in buying outpaces that for selling by almost 9:1.
- Searches for “ETFs” are not quite at record highs for the current decade, but they are higher than all but 3 months since 2010.
- Searches for “Mutual fund” are at highs not seen since 2011, and actually outnumber ETFs by 2 ½ to 1.
- Searches for 401K hit a post-Crisis high in January.
#2 – TD Ameritrade’s Investor Movement Index (BULLISH). The online brokerage firm keeps a proprietary index of client trading and ownership patterns, and this measure reached an all-time high in February 2017.
You can see the index details here, along with a short video describing the latest findings (including individual names where TD’s clients were active).
#3 – American Association of Individual Investors (AAII) Sentiment Survey (NEUTRAL). This is a very widely watched data series, and it shows that individual investors are not as bullish as they were earlier in the year. As of March 16, 31% reported being positive on the near term direction for US stocks, as compared to 46% at the start of the year.
#4 – Investment Company Institute Money Flows (BULLISH). The ICI now reports mutual fund and ETF flows in the aggregate, and the combined inflows into US equity funds through March 8th are still quite positive. Year-to-date 2017 flows into US stock funds total $27.3 billion, as compared to net outflows through this point in the year in both 2015 and 2016.
#5 – Daily Average Revenue Trades (DARTs) for publicly held online brokers (BULLISH). At least 4 online brokerage firms with strong brand recognition among retail investors regularly publish data on their trading activity (E*TRADE, Interactive Brokers, TD Ameritrade, and Schwab). Year-to-date the trend is positive, with three of the four firms posting gains in DARTs for the January/February period.
Worth watching: what does the recent price war among the dominant online retail brokers do for volumes in March/April? Will it encourage further retail investor involvement in US equities?
THE UPSHOT: Yes, retail investors are more engaged with the current leg of the eight-year-old bull market than at any point since at least 2010. And why not? Generally rising equity prices with little volatility and led by households names (remember that FB, AMZN, GOOG/GOOGL/AAPL are 25% of the S&P 500’s returns for the year) is a market tailor-made for retail. It’s like the late 1990s, but for the Boca Raton generation…
Now that we’ve settled that question, the only issue remaining is “Does it matter if retail is driving US equity prices?” The answer is a resounding “Sort of…” Here’s why:
- Retail investors tend to be very focused on current news flow. When a given stock generates a lot of attention, they tend to trade it. They clearly like the current President’s economic agenda, but what happens if they lose patience with the pace of progress in Congress? (See here for an academic study on this phenomenon)
- Their activity can move markets in single stocks over the short term. See here
- While I personally hate the “Dumb money/Smart money” caricature of retail/professional investors, there is some academic work that supports the notion that retail exacerbates capital markets anomalies. See here
Now, none of this means that US are predestined to fall when/if the retail investor spooks at the first loud noise. But it does point to an underappreciated piece of the current equity rally – that it is occurring early in the year. The last few years notwithstanding, Q1 tends to be a strong period for individual investor equity market inflows. Wealthy retail investors with 401Ks often max out their yearly contributions during bonus season. Less affluent savers write their IRA checks ahead of the April tax deadline. The first quarter is logically when retail investors are most active in the capital markets.
So if you are looking for a catalyst that might end the current rally in US equities, mark April 18th on your calendar. Yes, Tax Day in America has been postponed for a few days because of when it falls (the 15th is a Saturday). After that, retail investor flows will rely more heavily on headlines than simple seasonal patterns.
Alexa… When should I sell my stocks?
via http://ift.tt/2ny88LR Tyler Durden