Retail Investor Bullishness Collapses

It started before the sell-off.

TD Ameritrade’s Investor Movement Index – “designed to indicate the sentiment of retail investors” based on what they’re doing in their accounts and “how they are actually positioned in the markets” – plunged 23% in February to 5.95, the biggest month-over-month plunge in the history of the index, “as volatility returned to the market.”

This comes after a 9% plunge of the index in January, the largest month-over-month plunge in three years, which occurred despite the final spurt of the rally that took the stock market indices to new highs on January 26. It’s as if retail investors, for once, smelled a rat. After which the sell-off started:

TDA Chief Market Strategist JJ Kinahan explained in an interview that TDA’s clients “didn’t want to be as exposed” in February to risk “as they were.”

“What’s interesting is they were net buyers, and they were net buyers because of the February 9th move,” he said. “They bought a lot of stocks that day. But as the month went on, they just continued to sell those stocks back out, and then some. So it was a really interesting pattern that developed.”

The stocks they bought had “lower beta than some of the stocks they sold,” he said. “So it was really and truly a risk-off trade. But the bigger part about it is they lightened up their exposure across the board. So one or two days truly of buying,… but after that, not only selling what they’d bought that day, but selling on top of it what they’d bought earlier” this year and last year.

In the chart, several things stick out:

  • The phenomenal spike in enthusiasm among retail investors during much of 2017, topped off with the drunken exuberance in November when the index spiked 15%, its largest single-month increase ever. It left the index far outside its normal range.
  • The relatively muted enthusiasm at the beginning of each of the prior two sell-offs. The S&P 500 index dropped 19% during the sell-off that ended in early February 2016, and 18% during the sell-off in 2011. But the change in sentiment among retail investors was relatively tame compared to what happened in January and February.
  • Return of the index toward the normal range after the plunge in January and February. In other words: bullishness has collapsed from the drunken highs, but remains strong and has room to drop further.

TDA’s Historical Overview notes that the IMX “has generally correlated with the S&P 500 as clients react to equity price movements, but the index has gone through uncorrelated periods.”

When the index for December was released, TDA reported that its clients had been net buyers for the 11th month in a row, one of the longest buying streaks, and ended up with more exposure to the stock market than ever before in the history of the index. TDA’s Kinahan said at the time that clients were “up to their knees in it” at the beginning of 2017, “and then up to their thighs, and now up to their chests.”

“As the year went on, people got more confident,” he said. “The market was never tested at all” last year. There was this “buy-the-dip mentality” every time the market dipped 1% or 2%. But one of his “bigger fears” for 2018 was this very buy-the-dip mentality. People buy when the market goes down 1% or 2%, and “it goes down 5%, then it goes down 8% — and they turn into sellers, and then they get an exponential move to the downside.”

“It’s hard to believe that the market can go up unchallenged,” he said at the time. And this is precisely what happened a month later.

The January plunge of the index preceded the sell-off in early February. What everyone wants to know now is what the index’s much bigger plunge in February might precede. But whatever the plunge of the index means, one thing is clear: The extraordinary breathtaking enthusiasm of retailer investors late last year has unceremoniously collapsed.

During the sell-off, the Fed ignored Wall Street. Read…  Fed’s QE Unwind Marches Forward Relentlessly

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  42 comments for “Retail Investor Bullishness Collapses

  1. They used to call this group “odd lots”, and they are always wrong about the market

    • Wolf Richter says:

      I thought it was because they tended to buy “odd lots,” such as 23 shares of IBM, because if they wanted to have 20 stocks in their portfolio, that’s all they could buy. And they couldn’t afford to buy “round lots” (100s).

      Back in the day, trading odd lots was expensive. You ended up paying the same price as for a round lot of 100 shares, or something like that. Can’t remember… no one is talking about trading commissions anymore. But it was a hot topic back then, which made room for discount brokers, like Schwab.

      • In the 90’s the new electronic exchanges allowed you to buy stock bought in street name, and that ended the mailing around of certificates to clearing houses. I have done that. The move opened up markets, brought in more liquidity, and led to the day trading industry. That collapsed because institutions had faster computers, which led to ETFs and indexing. A great deal of the stock market gains since then have been based on accessing new money, creating liquidity, adding liquidity raises prices without any real fundamental growth. Liquidity reverses in part when new opportunities for investment are created; venture capital, crowd funding, cryptocurrency, liquid markets in what used to be illiquid investments like bonds. The retail investor has more choices.

  2. Nick Kelly says:

    I see the Dow is up 330 points Monday.
    Is this a bad news is good news thing? i.e. since a trade war would wreck the economy, now the Fed will HAVE to back off. Or something.

    Because on its face, the tariffs look like very bad news as all the economists tried to tell Trump.
    I wonder what the base will make of his proposed 25 cent a gallon increase in the tax on gasoline.

    • Wolf Richter says:

      It’s called volatility.

    • Nicko2 says:

      WallStreet knows Trump is a paper-tiger. Hence, his words/tweets are nothing but distraction.

      • Robert says:

        Your post :

        ¨WallStreet knows Trump is a paper-tiger.¨

        If President Trump — metaphorically speaking ONLY — blows up Wall Street as a result of some pronouncement or action or policy . . . . will he still be a paper tiger ?

        pa·per ti·ger
        ˈpāpər ˈtīɡər/Submit
        a person or thing that appears threatening but is ineffectual.

        It might be to his advantage to appear to be a paper tiger when he is not. I am not stating that he IS NOT a paper tiger — only that, by definition, if he blows up the financial system in some way, then he most assuredly IS NOT a paper tiger.

        • Prairies says:

          Don’t forget someone was claiming that the climbing stock market was a sign of how good he was at his job. Something about being amazing, real great or super good because it was so high, like really high. Then went silent after watching the Feb. numbers stumble under interest rate pressure.

      • Pat McKim says:

        That Paper Tiger passed a tax bill that many wanted but it is destroying residential real estate in NY and CA where a lot of fat cats live. I’d hate to see a real tiger.

    • We import almost no steel from China?
      Trump held off on tariffs when he wanted China’s help with Korea, and he got nothing, now he slaps a nothing sanction on them. Check out global liquidity

      • Jerry Goodwin says:

        I’ve see the charts showing how much steel we import from Canada, Mexico, etc. I’m suspicious these don’t tell the full story. What I’d like to know is how much of that is simply production displaced by Chinese production. For example, how much steel is traded between China and Canada, and which way is it flowing? If China is dumping steel on Canada and Mexico and they are in turn dumping their own production on the US, that’s a different story than is being reported.

        There were reports a while back that China was dumping steel at lower-than-production-cost on the world market. If they are, it has to be going somewhere.

  3. DanR says:

    As a retail investor who recently discovered targeted volatility for stock indexes, I’d say the low volatility last year lulled in retail investors and the spike in volatility now makes them risk-averse.

  4. Danno says:

    TDA bought out Scottrade and the final combine was done two weeks ago. Were adjustments made in the stats by TDA ? Or not ?

    • Wolf Richter says:

      The data is derived from activities in the accounts of their clients. They don’t look at the data of all clients but a sample of clients. These are clients they had for a while and that have been active so that they get meaningful changes over time. The Scottstrade acquisition should have zero impact on the data.

  5. Max Power says:

    This just means the buybacks machine will have to churn even faster.

  6. Hirsute says:

    I’m convinced this is IT. The cathartic moment of purge that we never got after 3/9/09. See y’all on the other side!

    • James Levy says:

      I think it’s a question of how much money the big-time, well-connected elites actually have in the stock market. Do they see a dive as a threat to the bulk of their wealth, or a serious annoyance they can live with for a time? Do they have the clout to force the Fed to intervene, or do they not care enough to all push at once in that direction?

      The 100,000 or so people who really matter in America are so wealthy that they may be diversified enough to weather a stock market crash. They have recent experience of one, and they simply came out the other end even richer, both absolutely and compared to any group in society that might oppose their interests, than they went in. The 1929 Crash severely weakened the Power Elite in the United States and left them incapable of fully blocking reform. I’m not sure that they fear another crash, and I’m not sure if they are not rich and powerful enough to stop one in its tracks. The situation is beyond my ability to forecast.

      • Dispassionate Observer says:

        The primary ones to suffer in that scenario will be those relying on public pensions, have money market accounts, 401Ks, or IRAs. And depending on interest rate effect, anyone with debt, and/or no emergency fund. So…pretty much everyone else! Let’s watch those Hormel sales…and bring back the “victory” garden. I am interested to see which way the ball bounces: deflation, inflation, or split-flation: necessities inflating, luxury goods deflating.

        • Hirsute says:

          Good economy or bad economy, I suggest everyone grow some of their own produce. Can’t beat it.

  7. Insta says:

    I don’t know if this is ‘It’ quite yet, but I am becoming more and more convinced that whenever the full crash finally happens it will be way worse than almost anyone is expecting. I truly think it will be like the 1930’s and 1940’s in the US or like Japan since 1990 and take a couple decades to get back up to the previous peak once it fully drops.

    I also expect it to take at least 6-9 months minimum to get to the final bottom…. we need true capitulation. What has happened so far is a minor hiccup and they may yet push for one or two more record peaks, but I doubt all that much higher percentage wise. People are too conditioned to think it will all recovery quickly by the last 2 crashes and need to realize it could take longer than the rest of your career if you are in your 40’s.

    I truly enjoy your site Wolf and don’t want to post too any other links, but this is an interesting post related to investor psychology. The article also discusses how dividends in buy and hold can be affected by reduced company profits.

    • Mvrk says:

      “…it could take longer than the rest of your career if you’re in your 40s.”

      Actually, it could take longer than the rest of your life if you’re in your 60s or 70s. I was blown away by the percentage of retail investors piling into the market in Q4 2017 who are in the 70+ year-old demo (according to T. D. Ameritrade). FOMO – Fear Of Missing Out. I just hope they were doing it with their casino fun money as opposed to their retirement nest egg.

      • Bead says:

        There’s plenty of noise about bond bubbles, though. The Great Moderator is leading the choir. So if you can’t trust stocks and you can’t trust bonds I guess it’s “live it up” on 2% CD interest. The Fed has been clear that elderly Americans have already had as much fun as they will be allowed to have. No safe investments and no measurable inflation, either.

    • Nick Kelly says:

      If you think it will be worse than the 30’s you will have to ratchet up the ‘6 to 9 months’.
      The bottom for the stock market after the 29 crash was not reached until 1934.
      If you bought stocks in September 1929, you weren’t back where you started until 1954, 25 years later.

  8. Rates says:

    The Plunge Protection Team will probably keep the market up for a while so that retail investors will come back. After that they’ll pull their support again and the usual folks will clean up.

    The nice thing about a crash this year is that we can say Every Dog has its day. And for people who don’t get the reference, it’s the Chinese Year of the Dog.

    Woof, woof.

    • philbq says:

      That is sharp! The Plunge Protection Team… Yes, I wonder if the rich upper 20% who own most stocks will stay quiet as the market corrects and they lose money.

      • The concept of a PPT was removed by the massive stock market rescue package in 2008. That policy far exceeded what small bit any government manipulation could accomplish buying and selling futures to paint the tape. (Which incidentally notice how the S&P bounced off the 200ma a few days ago) If their power and hubris always far exceed what you can imagine what is next? The ultimate manipulation, is no manipulation. The next big shock will be when markets collapse and CBs do nothing (and you find out that things correct themselves).

  9. philbq says:

    This is nature taking its course. The market was a bubble created by easy money, fueling stock buy-backs and margin traders. The tightening of the Fed is bringing that to an end. The P/E of the S&P is close to that of the 1929 crash. Stocks are way overvalued. This is economic gravity taking hold. The political element is the fact that 80% of all stock is held by the upper 20% income group. These wealthy people have benefited greatly from the bubble , and from the globalization of the last 25 years. Will they now be willing to take big losses?

  10. philbq says:

    Let me add this: The historical S&P price/earnings ratio is 15X. It was 23X in Jan 2018. The only time in the last 25 years that stocks were more expensive was 2000 and 2008 – and both times a major correction (or crash) happened. This is economic gravity happening. Stocks get over-pumped by cheap Fed money and investor greed, and then gravity sets in. That is what is happening now, as the Fed tightens. It is the market coming back to reality.

    • raxadian says:

      At a snail pace to hopefully avoid a big crash. Thankfully Spain and or Italy look like they might crash first .

      Then again while the Brexit fumes last, The Eurozone might not let those two fall yet. All while Greece cries foul.

  11. Bead says:

    I posted a comment suggesting the chumps would be chased away so the big boys could enjoy their tax cut bonanza. In other words this looks like a design feature. Run the stops and frighten Ma and Pa so they “make do” with their 2% CD.

    • Frederick says:

      I’m getting 4 percent on my dollar account with ING bank and just waiting for this Ponzi to blow sky high Hopefully my gold and silver investments will finally get some traction when everything goes to heck

      • Bead says:

        I wonder if gold investments will ever gain traction. It seems to me the banksters and their protectors have means and methods to foil the gold bugs. That’s why we have bitcoin!

  12. gorbachov says:

    I’ve read somewhere that retail just doesn’t matter

    except on the margins.

  13. Bead says:

    Bloomberg published a counter-narrative this morning about the deplorable flyover rubes buying shares in February. The anecdotal evidence comes from some investment advisors, doubtless a representative set. Those advisors describe an incomprehensible Trump cult of personality, quoting some cult members as believing the removal of business regulations will spur the economy. Impossible! Everybody knows that enormous compliance efforts add to our well-being. Where would we be without our lawyers?

  14. Paul says:

    In any bubble, a couple stocks will out perform the averages by big margins. When they fall, the shit hits the fan. IMO, the stock that could kill the market this year is amazon.

    Contrary to the change the world crowd, Amazon really doesn’t make money. A 1.7% margin is a rounding error and deliveries are a serious issue. But what the online retailers have done, is knock the crap out of brick and mortar. WMT’s profit has fallen 20% in three years.

    Even armies that win wars lose troops. I think AMZN is going to shock the shit out of the market this year. It’s already 50% overpriced at least. And a 25% hit, which doesn’t even give back the last 6 months gain would hack 175 billion out of portfolios.

    This would cause the market to implode and take TD Ameritrade’s gaffer investors along with it. I think this year, politically and economically, we are back to 1937. Between tariffs, which are coming, a huge EU-US rift, as well as massive political discontent it’s going to be a major challenge.

    • Robert says:

      AS AN EXAMPLE, I know that many or most big-studio movies that are produced, LOSE MONEY on paper, but they have ways of concealing substantial profits that are not shown in public reports and distributed to the producers.

      Could it be that such a behemoth as Amazon really has profits, NOT QUITE INVISIBLE PROFITS, that enrich its Sr. Managers and Directors and other players — beyond the immense wealth that AMZN stock ownership already confers ?

      There are several kinds of ¨Money Losing¨ business entities that are quite profitable for various who know how use them.

      • Paul says:

        Robert, the short answer is no. Studios don’t hide profit they hide costs. Most of the costs in a movie are paid by state and local tax credits’ For example, one paramount production last year had a production budget of 70 million and Paramount paid 10 million of that.

        I was an accountant for 25 years. There’s very little hidden in a retailer. In brick and mortar it’s usually capitalized leases but Amazon owns it’s distribution centers. Their capex and depreciation numbers are the same which you’d expect in a tech company.

        The IRS allows you to express in process R&D so there might be equity tied up there that could be could be realized later but in the end of the day, retail is money in money out.

        • Robert says:


          The benefit of hiding movie production costs is unclear to me, since costs are deductible, but accounting never was my thing anyway.

          I have read this REPEATEDLY over the years, ¨Most big-studio movies show no official profit (after production costs are posted) but there is almost always a substantial profit for the studios.¨

          Here, I found a link :

          I will say this for sure, Wage-slaves (meaning W2 earners) such as myself, must ALWAYS play by the rules, because there is little room for finagling in the W2 world.

          But if it´s millions, or tens of millions, or hundreds of millions — well they have different rules. Such as the ¨Carried Interest¨ deduction that President Trump PROMISED TO END.

          Color me confused.

      • Nick Kelly says:

        The movie Forrest Gump was based on a book by an author who did a silly thing: he sold his movie rights for a percentage of the profits.

        So the movie goes on to be a blockbuster grossing hundreds of millions.
        The authors cut? : zero, nada, zip.

        Why? Because there was no profit, as determined by the producers’ accountants.
        The author died, no doubt heart- broken but his estate sued, successfully, but I don’t know for what amount.
        The suit lead to a change in law limiting, somewhat, what movie accounting can get away with.

        Although it’s a tough field (see oil cos depletion allowance) the movie producers are right up there when it comes to removing profit. ‘We need to rent a house to shoot this scene? Well how about we rent my house for ten thousand a day?’

        The movie (and remake) The Producers is quite instructive.

    • Bart says:

      Amazon generates if memory serves me correctly around $2B in cash flow. It’s trading around 1535 today but for the sake of simplicity, the valuation is around 750 times cash flow. At 20 times cash flow Amazon would be around $40 per share.

  15. Realist says:

    Regarding trade deficit, is it possible for the issuer of the world’s reserve currency to not have huge trade deficits ? After all, the most important export are those green pieces of paper, thus luring trade partners to give their goods against paper that pointedly is created out of thin air …

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