It looks like the worst may be over for the stock market. And while a ‘double dip’ may be just around the corner, for now it looks like retail investors are once more ready to take on risk. But are they actually ready to bet on higher stock market levels or are they simply trying to be opportunistic?
A recent article in the Wall Street Journal explored this question.
August is usually a slow month for both retailers and institutions with a 10% expected average drop in volume. But this past August brought with it an abnormal increase in trading volume. The majority of online brokers had increases of 14% to 18% in daily transactions. As well, the aggregate daily trading volume for Schwab (SCHW), TD Ameritrade (TD) and E-Trade (ETFC) show a robust increase not only from the past month but also compared to the past year (see left chart).
While there is still a massive pile of cash sitting on the sidelines, we aren’t seeing it being funneled to the equity market aggressively by mutual fund buyers. They continue to send the majority of their money to ’safer’ bond funds by a 20 to 1 margin (in August equity funds took in about $2 billion while bond funds absorbed $40 billion).
Gauging daily trading volume across online brokers is one method to measure retail investor mood. I use another which is much easily available and one which I’ve dubbed the Sheeple Index. It is a measure of the traffic activity for the websites of major online brokers. The logic is that we can see the footprint of the retail investors as they log on to make trades.
It isn’t a perfect indicator. For one, there is an inherent seasonality to internet traffic, much like the stock market’s volume which wanes in the summer. But it is a good enough metric because while there are still a tiny, sliver of a percentage of people who place trades over the phone, nowadays, the vast majority of people (including grandparents) are using the internet. As well, the traffic for the brokers which I measure are used by retail traders primarily. I ignore those preferred by more active or professional traders.
Having said that, there is no accurate way to measure the traffic of a website other than having direct access to its logs. There are a few third party sites which have taken different approaches to try and approximate this data but they each have their own weaknesses. As well, it must be noted that even if we could somehow measure the activity accurately, we would still have no way to know if what we are seeing is new money being put to work or just ‘churning’ in the account.
The next is from Google Trends for websites. I only included US website traffic:
And finally, the data from Alexa.com:
Well, there you have it. Compete’s data seems to agree with Alexa in showing a modest recovery of sorts. The traffic from Google Trends is the most pessimistic, showing a continuing decline for all of the brokers. At least according to this measure, we are not seeing a significant uptick in usage activity for online brokers.
AAII Data Corroborates
According to the AAII, US retail investors were shell-shocked by the most recent bear market into reducing their equity exposure to the lowest since they started keeping stats on portfolio allocation 21 years ago. But since the March low, they have increased their equity allocation from its all time low to the present level of 54% - which is close to its long term average.
But looking at the AAII weekly indicator, although we’ve seen short lived extremes in AAII sentiment bullishness, we have yet to witness a sustained level of optimism like that which we saw take root from mid 2003 into late 2003 as that cyclical bull firmly established itself in the charts.
Whether we are talking about lowly retail investors or professional hedge fund managers, we’re all human. Watching the stock market pull out of the station with you standing on the sideline is painful. It is adding insult to injury coming on the heels of the losses from the bear market. So it wouldn’t be surprising to see people piling on after a significant rally to not be left behind.
The Sheeple Index doesn’t tell us if people are logging on to their accounts to trade or put new (patient) money into the market. But even if it represents short term trading, it still speaks of the willingness by retail investors to come out of their shell and once again, take risks.
But we aren’t really seeing that - yet. According to several different measures, the AAII weekly survey, AAII portfolio allocation, equity fund flows, and the Sheeple Index (website traffic), the US retail investor is tip-toeing back and far from wildly exuberant.
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