Once Again, Late to the Party?

On occasion, I come across interesting and — inadvertantly telling — stuff in the Personal section of the Journal.

Today was one of those examples: A column titled Individual Investors Shift Assets to Stocks discussed the big influx of funds into equities by retail investors in January:

"Individual investors are moving into the stock market at a stronger clip than seen in years.

The number of trades by individual investors has risen substantially at discount brokerage firms in recent months and jumped an estimated 30% to 40% in January from December. The discount firms, which offer lower-priced trades, also report that money flowing into stock mutual funds last month was at a near record level. Charles Schwab Corp., for example, saw $4.5 billion flow into its stock mutual funds last month, the highest amount since February 2000, when net investments hit $4.7 billion."

This is important for several reasons. Ask yourself this question: Are retail investors more likely to "pile into" equities at the very beginning of a Bull Market, or at the tail end of a Bull Market?

The answer is given a few paragraphs down:

"Rallying markets have piqued interest. The Dow Jones Industrial Average is up 3.92% so far this year. Yesterday, stocks rose strongly despite a report that the consumer price index jumped 0.7% in January from the previous month. Investors took heart, however, because the key inflation measure was up just 0.2%, excluding the volatile energy and food indexes. The Dow Jones industrials rose 68.11 points to 11137.17, its highest level in nearly five years."

So once again, we see that the little guy is late to the party. Its no surprise when we look at the headline news and data: The drumbeat of rally news about the Stock Markets at 5 year highs, the inflation "spin" (see above), the positive data recently on Retail Sales and on Home Construction. Nevermind that these were weather related temporary aberrations, the headlines were net Bullish.

This is how sucker rallies draw people in — and tis also how tops get made. Once the most naive and least informed buy in, who else is left to drive prices higher?

Retail investors are being drawn to stocks partly because of weakening returns from some other investments such as real estate and bonds, which have suffered as the Federal Reserve continues to raise short-term interest rates. Indeed, net inflows into bond funds so far this year are only half of what they were a year ago. Even investors’ appetite for cash-like investments appears to be waning, despite yields of as much as 4% or even higher. Assets in money-market mutual funds, for example, were up only $4.1 billion last month compared with average January inflows of $33.4 billion for the past 10 years, according to iMoneyNet.com.

Let’s review:  Sit in cash when yields are practically zero, move out when yields are over 4% (6 mo CDs are paying 4.5%). Cut back on Bonds once their yields become attractive.

Another example of chasing last year’s performance: retail investment in International funds:  "Much of the interest in stocks appears to be going overseas. International equity funds, a sector that represents only 15% of total assets among all stock mutual funds, captured about 80% of the inflows into stock funds so far this year, according to AMG Data Services of Arcata, Calif. . . Foreign stocks’ appeal stems in part from their recent superior performance."

Finally, ket’s have a look at prior such pattenrs of retail enthusiasm:

Domestic retail trading volumes have steadily climbed since hitting a low in February 2003, according to an analysis by Sanford C. Bernstein & Co., a unit of Alliance Capital Management LP, and are approaching levels last seen in 2001 before the market crash. Although active traders were the first ones to return to the market, "now we’re beginning to see the core investors come back — the families, the 40-year-olds with kids and retirees," says Bernstein senior analyst Brad Hintz . . .

The discount brokerage firms, which represent an estimated 8% of all
retail commissions, say they are seeing a record level of activity, and
many of them are rolling out promotions offering free trades and cash
back to get investors to open accounts. OptionsXpress Holdings Inc.
reported a record level of trades, new account openings, and assets
last month. At TD Ameritrade Holding Corp., trades from just the
Ameritrade business, which recently merged with TD Waterhouse, were up
32% last month from December, the second highest month-to-month
increase since 1999. (The previous peak was January 2004, when trading
volume rose 44%.) Online brokerage firm ShareBuilder Corp. says it
opened more than 40,000 new accounts in January — the highest number
since 1999."

The lowest level of retail participation:  February 2003. That was a month before the Iraq Invasionbegan, and turned out to be an ideal time to purchase equities. Indeed, that was the best time to make buys since the market topped in 2000.

The worst time?  Well, the last surge in retail stock purchases in 20011 turned out to be amongst the very poorest time to make new purchases.

I trust that this comes as no surprise to those of you who pay attention to these sorts of things. Technology changes, new companies open, new fund managers garner the spotlight. All manners of related items shift, morph, refocus change. 

The only thing that is timeless is Human nature. That song forever remains the same.


Individual Investors Shift Assets to Stocks

Brokers Report Near-Record Trading Activity,
Investment Flows; Moving Out of Real Estate

WSJ, February 23, 2006; Page D1

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What's been said:

Discussions found on the web:
  1. Tony commented on Feb 23

    remember what they say: “The masses are asses”

  2. Ben commented on Feb 23

    Barry is this bullish for U.S. stocks since most of the money is going to overseas markets?

  3. Mark commented on Feb 23


    Go ahead and call the top. This is ridiculous.

    See the action in the Dow? Four stocks leading the charge to higher ground. 17 are 20% or more off their highs. JUST LIKE DESMOND SAYS.

  4. CDizzle commented on Feb 23

    Barry – Thanks for dissecting this article. I read it this morning and it hit me on a personal level as I’ve gotten out of ET too early twice now. (Better too early than too late?) Clearly the online brokerage stocks have run up tremendously and the retail behavior smacks of greed to me, plain and simple. I really appreciate you taking the shine off of various implicit marketing articles. Too many people read that article and think, “Man, I gotta open an account right NOW!” Me…I look forward to buying ET back at 17.

  5. scorpio commented on Feb 23

    i guess it was just too obvious for CNBC and WSJ to actually go ahead and make the connection betw the last time retail inflows this high in Feb 2000 and the subsequent market top in March 2000. but allow me, as i am the master of the obvious

  6. B commented on Feb 23

    “Let’s review: Sit in cash when yields are practically zero, move out when yields are over 4% (6 mo CDs are paying 4.5%). Cut back on Bonds once their yields become attractive.”

    Plain old money markets were 4.1% at Fidelity before the last rate hike as well. Bank loan funds and IRA insurance wrappered cash funds are 5.5-6%. And we can expect a nearly guaranteed increase of 50 basis points additional to those guaranteed investments within the next few months.

    I just saw your Kudlow buddy from Fifth Third Asset Management on CNBC. He’s recommending a dollar cost averaging over the next few months for those making wholesale reallocation of investments into equities. It was in response to this exact article you are mentioning above. Swear to God. Exact words. Can you say deer in the headlights? Part of his rationale is the comparative cheapness to alternative investments.

    Now, I hate to be so critical but it never ends and it bothers me that so many people rely on these sound bites as advice. Are these CNBC guests truly that dense? There is a never ending flow of them. If you take a snap shot in time, what information can be gleaned from that data? A still picture? Not alot. You need multiple snap shots to develop a picture MOVIE. Context.

    It isn’t that alternative investments are cheap, it is the trend of the alternative investments. Higher rates and inflation pressure means his thesis is working against him. Is that really so hard for someone to understand who manages hundreds of millions or more? Do any of these people have any formal training in risk management? I know some do but they are the few who actually do outperform the indices.

    Dow 14,000 this year! lol.

  7. B commented on Feb 23

    One more. Thomson Financial on with Sue on CNBC arguing with a Schaeffer Research gent on this same article above.

    Thomson says the S&P is cheap compared to when the PE was 30, now being 15. Uh, yea. Which, it ain’t really 15 when you take option expensing, underfunded pensions and use real earnings not this operating earnings garbage. His argument when bantering with the cautious guest was that he loves this argument. It’s they typical wall of worry. I guess stocks rose that wall of worry in 2000-2003 as well citing the last time inflows were so great. Huh? HUH? Are you DEAF?

    I enjoy a pleasant argument on facts or disputable evidence but when the other guest is citing fact after fact including mutual fund cash levels, individual investor flows, rising rates, etc and the only thing that comes back is he’s my argument for a wall of worry, I want to commit seppuku.

  8. Chad K commented on Feb 23

    Always best to be out early than late…

    Now it’s just a sit on my cash and wait game.

  9. CDizzle commented on Feb 23

    One more thought that I glazed over:

    Let’s remember that it’s QUITE possible that people are self-serving when making public appearances (CNBC, WSJ, etc.). That is, consider that perhaps their personal portfolio management techniques are quite different from those which they espouse via the media. To simplify, if I run a mutual fund (or the like), isn’t my own best self-interest to motivate the individual investor to KEEP INVESTING?

    Interesting that Fed Chiefs Greenspan and Bernanke (I believe) are obligated to disclose holdings (Bernanke’s SOLE equity position is MO, though I imagine we all know that by now) but investment managers aren’t? Who has the vested interest?

    There may be a fairly fine line between a logical hypothesis and speculation on the morals/ethics of various individuals. So be it. As St. Hubbins would say, “it’s such a fine line between clever…and stupid.”

  10. ryan commented on Feb 23

    The best evidence for the public participating at a potential top is in commodity (especially energy) and foreign markets. The has not been some huge rush to get into US stocks. If you are going to buy into the whole public masses as contrary indicator then your first targets ought to be commodity stocks and emerging markets. (yes, that means gold too.) So, watch yourself, if you are using this article to back up your bearishness on US equities, don’t ignore the recent mania in energy and massive public interest in gold and foreign shares.

  11. alex norman commented on Feb 23


    Another great “contra” indicator. Looks like it may be time to start reducing beta.

    Also, great last line. Hope it was a deliberate intra-blog allusion to “Teens Save Classic Rock” (cf. — see my post…)

  12. tesserarius commented on Feb 24

    B, ‘Part of his rationale is the comparative cheapness to alternative investments.’

    To be excessively fair, that sounds like it might be a reductive application of Joachim Fels’ (of Morgan Stanley) argument that equities are the least-overvalued assets class, and that liquidity will continue to flow there preferentially, particularly when markets burp, making central banks panic and floor it. Good to consider if you’re temperamentally cynical, or confident that the Fed are political tools.

  13. Rodge Podge commented on May 9

    Looks like the investors weren’t late to the party afterall with the Dow over 11,600. So much for simple maxims and technical analysis hogwash.

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