Trader’s Narrative

Money tends to get shuffled around from place to place and hand to hand.

Within the financial markets the big three boxes are stocks, bonds and cash. When the bets are placed, over time, the retail traders tend to lose and the deep pocketed, well informed institutional traders tend to win.

So by looking at where the retail traders are placing their bets, we can get an idea of where to not place ours.

AAII Allocation Data
The American Association of Individual Investors (AAII) is famous among those who track sentiment for their weekly survey. But they also keep track of several other key data points. Among them is the allocation ratio of their members between cash, bonds and stocks.

From the latest data, AAII respondents have said that they have increased their cash positions to almost a third of their portfolio value. This is the highest cash levels since late 2005 and 2002. To raise the cash allocation, retail investors have sold their equity holdings.

In comparison to the summer of 2007 when the allocation for equities was almost 70%, today it is just above 50%. To find similar levels we’d have to go back to November 2005, summer of 2002 and May of 2003. Each of those instances were great buy points with a long-term time horizon.

But remember, this is as reported by the membership of the AAII. There is no way for them to verify if indeed what their members are reporting about their allocations is true. So let’s take a look at actual fund flow data.

Fund Flows Data
According to AMD Data, July’s money market funds reports net cash inflows totaling $44.402 billion! That is a very large amount for one month.

Back in April, I pointed out the reverse: a massive exodus from money market funds to the tune of almost $80 billion. Since then the average mutual fund investor has consistently increased their cash position - which would tend to lend credence to the AAII survey results.

Caveat Trader!
The market always throws curve-balls to keep things unpredictable and exciting. So remember, retail traders are not always wrong.

Over the weekend, Barron’s coverstory was “Where’s the little guy?”. Basically it pointed out that while the market has gone (almost continuously) higher, there has been a lack of participation from the “little guy” or retail investor.

This is something that I wrote about at the beginning of May, when I asked, Where are the retail investors?

In that note, I looked at the internet traffic directed to the major electronic retail stock brokers. My logic being that the level of activity from retail traders would show up as they logged on to their accounts online. I call this my “sheeple index”.

Unfortunately the best data source for internet traffic is Alexa. It is a flawed measure for various reasons but still, I do believe that it does show more or less the level of interest that regular people have in the stock market. Especially when such apathy is confirmed through various sentiment measures.

Here’s an up-to-date version of the graph I showed before. The graph is a bit “herky-jerky” but more or less it shows the same trend continuing. We are not seeing any excitement for the stock market from the regular folks out there.

Which in a strange way is just fine. But only for a while. Eventually the bull market will need an infusion of capital to sustain itself. And the sheer size of it demands that it can only really come from one source, the retail investor.

If the market continues to go higher, its siren call will in the end lure in even the least enthusiastic. I agree with Barron’s that it would help galvanize the attention of the public for a very successful and widely known company to go public. The technology boom of the late 1990’s had Netscape, the quiet bull market of the mid 2000’s had Google (GOOG). We need another one of those.