Trader’s Narrative

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.

Below, I’ve shown several graphs of website traffic for online brokers. I’ve kept the colors consistent across the different graphs so they are easy to compare. The first is from Compete.com:
Continue reading ‘Are Retail Investors Really Coming Back?’

Everyone these days pays at least some attention to sentiment. Which means that the usual sentiment indicators run the risk of becoming saturated with attention, and therefore less effective.

Which is why I love finding novel ways of measuring sentiment. One that I’ve already written about is the “sheeple index” which is a measure of retail broker’s web traffic.

Another indicator is to measure the level of interest that people have in specific internet searches. For example, using Google Trends, we can see a history of people searching for “stock market crash”:

Since people would have to be really bearish to even think of typing in such a search string, it may have value from a contrarian point of view. As you can see each time there was a spike high in the number of searches for “stock market crash”, it was a great time to actually go long!

And here’s the chart for the keyword: “subprime”:

Again, note that the two spike highs correpond to intermediate bottoms in the market.

What about you? Do you have an unorthodox way of measuring market sentiment?