Although quite a ways down from its peak highs at end-January, the stock market appears to be rallying again.
While the market reached its lowest ‘post-Trump surge’ period in early April, falling back to levels last seen in November 2017, it has since recovered. The fact of the matter is that the US stock market is still at some of the highest levels it has ever been.
With such figures, you would think that investor sentiment would be positive on the market. So why are retail investors so negative on the market?
By that, we are referring to TD Ameritrade’s Investor Movement Index (“IMX”). As TD Ameritrade describes it, this is a “proprietary, behavior-based index that aggregates Main Street investor positions and activity to measure what investors actually were doing and how they were positioned in the markets.”
TD Ameritrade uses data from its clients’ actual trading activities and positions to create the IMX. And considering that TD Ameritrade has over 11 million customer accounts holding client assets of $1.12 trillion with over 500,000 daily transactions, the IMX is something worth paying attention to.
And what the data shows is that the IMX has been declining at an astonishingly steep rate for the past four months. Take a look.
In early-May, TD Ameritrade noted that the IMX was at its lowest point since 2016. The reason given was elevated volatility and investors using the climb in oil prices to rotate out of some big oil names. However, it also notes that its clients continue to be ‘net buyers’ despite beginning to lower their overall exposure to the equity markets.
The IMX and S&P500 Disconnect
From TD Ameritrade’s dry analysis of the IMX’s movement, it almost seems as if everything is business as usual; nothing to worry about. But a different picture arises when we compare the difference in the IMX’s movement over the past four months relative to the stock market to other periods of large stock market movements.
For instance, during the stock market selloff of 2011/2012, the S&P500 lost about 18% of its value. In the selloff of 2015/2016, it shed about 19%. Look at the IMX chart below and compare the difference in the decline of the IMX vs. the S&P500 (grey line) for 2011/2012, 2015/2016, and the past four months.
As you can see the movement of the S&P500 and the IMX moved relatively in tandem in the first two periods of decline. However, since the ‘Trump spike’, the crash in the IMX has been astounding; a decline of almost 50% since the peak. By contrast, the S&P500 hasn’t even declined by 10%.
So what’s driving this sudden disconnect? Now, because the IMX only began in 2010, we do not have the data to see if there was a similar disconnect during times of severe financial crisis. It might very well be the case that had the IMX existed back then that we would see a similarly sharp disconnect between in the months leading up to the financial crisis.
In a recent CNBC interview, JJ Kinahan, TD Ameritrade’s Chief Market Strategist says that although “earnings are up, nobody is quite sure what to do with them.” This is a reference to how in anticipation of tax cut-fueled earnings, the stock market reached previously unseen highs. But now that those earnings have actually materialized, the market doesn’t seem to want to move any higher.
At this point, we can only speculate as to the cause of this disconnect and whether it’s anything to worry about. Could the behavior of retail investors as a whole tell us something about the future of the stock market? We’ve spoken before about our overleveraged stock market, combined with the Fed’s QE unwinding (which is slowly accelerating; the Fed’s balance sheet reduced by $17.6 billion in April) may result in large corrections. Is this what’s on the horizon?
Whatever the case may be, intelligent investors know how to hedge their bets. They are investing in hard assets that are both long term stores of value and a hedge against the stock market as a whole; assets such as gold. No matter what’s in store for the stock market, it’s always better to be safe than sorry.
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