Retail Investor Bullishness Bites Dust after Huge Trump Spike

A 39% plunge in three months. But it was spectacular while it lasted.

Previously super-enthusiastic retail investors don’t like what they’ve been seeing in the stock market since January. That’s clear from TD Ameritrade’s Investor Movement Index, which dropped another 12% in March, after having plunged 23% in February, the biggest month-over-month plunge in the history of the index, and after having plunged 9% in January, the largest month-over-month plunge in three years. The January plunge occurred despite the final surge of the stock market rally that took the S&P 500 index to its still standing record close on January 26.

This wholesale collapse of retail investors’ enthusiasm for exposure to the market followed a breath-taking spike that had kicked off at about the time of the election in November 2016. Between that point and the final paroxysm in the stock market on January 26, the S&P 500 surged 35%. Retail investors went all in, and their enthusiasm boiled over, as stocks essentially just rose day after day in one of the least volatile periods in market history. So this is what the breath-taking one-year surge and the even more breath-taking three-month collapse of retail investor bullishness looks like – a near-perfect spike, but a lot steeper on the way down:

The IMX index also fell sharply during the past two sell-offs, the 18% slide in the S&P 500 in 2011-2012 and the 19% slide that ended in February 2016 – but nothing like the collapse of the phenomenal Trump spike.

The index, which tracks clients’ actual trading activities, is not based on what investors say they feel or plan on doing. It’s based on what they’ve actually done in their accounts and how they’re positioned in the markets. Unfortunately, there is no data for the period before and during the Financial Crisis.

And in just three months, the index has plunged from the stratosphere back to the level that TD Ameritrade considers “moderately low” – the lowest level since August 2016.

“Market volatility was once again prevalent during the March IMX period,” the report said, adding:

The market selloff continued during the period, with all three major U.S. Equity Indices moving lower. The S&P 500 and NASDAQ Composite Index both decreased more than 3.5%, while the Dow Jones Industrial Average was down 4.8%. Volatility was widespread near the end of March, with the technology-heavy NASDAQ moving in excess of +/-2% in four of the final six trading days, sparked by fear about whether the technology industry could face heavier regulation after Facebook’s handling of user data.

After the relentless one-year 35% surge of the S&P 500 index during the Trump spike, a return to normal-ish market swings, but with a downward bias, was very unwelcome, and retail investors took some more risk off the table. But they were not exactly massively fleeing the market for safe havens such as gold and silver, it seems….

TD Ameritrade’s Chief Market Strategist, JJ Kinahan said in an interview  that clients were “still slightly net buyers” in March, “however the exposure they’re willing to take is down for the third month in a row. In fact, it’s down to the lowest level we’ve seen in two years.”

“What it really means is they’re buying lower beta stocks (less volatile compared to the market) and selling any of the stuff that was higher beta (more volatile compared to the market),” he said. “And one of the big stocks they sold, which was a surprise to me that they sold it so heavily, was Facebook,” which was down 25% from its all-time highs, he said. “It was one of our top three held stocks.”

Clients sold the stocks that had “nice runs” in order to “regroup,” he said.

Whether this index is a leading indicator for the direction of the stock market (which it was in January and February), or a coincident indicator, or a lagging indicator, one thing is certain: After the election, retail investors bought whole-hog into the theory of the “Trump bump” in the market – and this includes, ironically, a lot of retail investors who were otherwise furious with the election outcome. Too bad for the market that this exponential “Trump spike” in retail investor bullishness suddenly and totally collapsed.

Meanwhile, whatever the markets are doing, businesses are now grappling with the end of the “credit cycle,” and new Chapter 11 bankruptcies spiked 63% from a year ago to the highest number of filings since April 2011. Read…  Chap. 11 Bankruptcies Spike 63% from Year Ago

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  27 comments for “Retail Investor Bullishness Bites Dust after Huge Trump Spike

  1. Armando Rubio says:

    Looks like the stock market continues to deflate, on the bright side this might be the cure the bond market (yield increases) needs.

  2. Pete says:

    Am sorry Wolf but this seems to me like great news…investors — retail investors, mom&pop investors— took profits (!!!) in Q-1(!!!). Isn’t that a good thing??? And they seem to be right as (a) the Vol has spiked (good for day traders maybe, but not necessarily for investors), and maybe the market’s putting in a rounded top. Sometimes the news is good…despite what the naysayers have been saying for the last few years… PJS

    • Wolf Richter says:

      Oh sure, for investors taking profits, it’s good news. Taking profits is always good news for those taking profits. It’s just that markets fall when investors “take profits.”

      • cdr says:

        I’ve never understood the concept of ‘not taking profits’. Buy and hold makes sense only when you’re saving for retirement or a rainy day or earning current income. Otherwise, what someone owns is nothing more than a trophy and completely useless.

        Of course, investment advisors and ‘the pros’ all demand buy and hold, because that’s how they make money … commissions and fees.

        I have no problem with leaving ‘some on the table’ after you move onto your celestial reward. Since nobody knows that exact date, it’s better to not outlive your finances.

      • It only falls when the sellers hit the bid, if they sell at the ask it goes up

    • SquarePeg says:

      The 2008 top was rounded too, with volatility first appearing in 2007 if memory serves me correctly.

      • alex in san jose AKA digital Detroit says:

        SquarePeg – Yep. Things started deflating in 2006. I had people telling me they’d lost serious money by waiting to sell their houses, losing $50k or so by not selling in 2005. It really became evident that we were in a crash in mid-2007. Everyone talks about “the 2008 crash” because I guess 2008 is when the bad news filtered up to the 1%.

    • Prairies says:

      I know someone who isn’t enjoying the profits. If he didn’t listen to a “financial advisor” he would have been just fine but the last week of January his “advisor” told him to go all in. The market is booming and he shouldn’t miss out on the endless growth – “this time is different” was being said quite often in December and January. Only to see the same ol’ routine rise and fall.

      In the end he will be fine, his portfolio still has a solid base, but all the profits he had last year he lost in February. If the market stays down he risks losing even more than just a profitable year.

      • pete says:

        very sorry to hear about that January investor who went all in on the advice of his financial adviser. History’s pretty easy to explain, the present murky and the future — despite the brilliant analysis on CNBC – impossible. Maybe this market is a ’rounding’ top, maybe it’s a wedge during which the market digests these huge gains and then moves higher again (trump settles China, Korea and Syria issues) or maybe the market spikes down 20% or more (& Buffet begins buying again) and then the market goes higher.

        The auto analysts have been selling tsla since $30/ share…PJS

  3. Bet says:

    Funny. That investors bullishness chart is what the indexes might be looking like by next year. Back to 2015 to 2016 levels

  4. Nick Kelly says:

    Note how steep the down- gradient of the Trump Slump is compared to the up- gradient of the Bump. Anyone care to extrapolate?

    It’s already being floated that Monday’s short- lived recovery from the Friday 500 down tick was going fine until the ‘surprise’ of the raid on Trump’s lawyer (that’s a surprise when the client denies knowing what contracts his lawyer is creating?)

    This Pres has got more surprises than the Dow has points.

    • There was a saying at the time, “Let Reagan Be Reagan”, and it worked for a number of reasons, the media loved him, and he knew how to work a crowd. The same dynamics don’t apply in this context. The most dangerous thing is he is not a stayer (the GOP is often called a party of comers and goers), the ultimate surprise would be no surprise, he quits.

      • Tom T says:

        Mr. Bierce,

        I agree and would be willing to bet that he does not seek a second term.

  5. Rates says:

    They took a cue from Stormy Daniels and have decided to escape to calmer waters.

  6. Justme says:

    >>least volatile periods in market history.

    I think the recent redefinition of the word “volatility” to mean only downward motions in market valuation is a big mistake. The redefinition does us all a disservice. Any kind of rapid fluctuation can and should be described as volatilty, not just the downward kind.

    Dictionary: Volatility is the trait of being excitable and unpredictable.

    • phathalo says:

      True, but as far as I know, volatility and gamma are not symmetrical; more often than not, increase in volatility happens during downward price movements. Fact remains that, during the TrumPump period and post-great depression era, volatility was low, notwithstanding the short-the-VIX strategy popular during the same period.

      • Justme says:

        To the extent VIX and other “volatility measures” respond asymmetrically to market climbs and drops, this is a SYMPTOM of WallSt using the wrong definition of volatility. Volatility is supposed to be a measure of the variance of a stochastic process, and variance is NOT a one-sided or asymmetric measure.

        • Finster says:

          True enough, but “volatility” has in the media become a euphemism for declining prices … a polite way to say the market may go down without scaring the masses.

  7. Gershon says:

    Looks like Da Boyz are exiting the Wall Street – Federal Reserve pump & dump before the Ponzi created by trillions in FedBux funny money “stimulus” implodes under the weight of its own fraud and fictitious valuations.

  8. raxadian says:

    This is what the FED wants after all.

    I am amazed about how long the Trump-Bump lasted. And those who listened to the people who warned 2018 would be a year were the FED would keep raising rates got out in time.

    Those who didn’t, well… you were warned, more than once.

    FED: Now you believe me about the rates?

  9. Paulo says:

    I still don’t see the foundation for all the hype that the Economy is strong, regardless of swings and trends in the investment market.

    I always feel quite positive about things in general, however, in this sense I see many (if not most) people barely geeting by. It seems that even white collar salary positions requiring specific degrees and connections are simply other versions of McJobs, and in many cases carry some huge student loan baggage.

    It’s tough out there.

    • Prairies says:

      Just remember who says the market is strong. Last year realtors said Toronto was bullet proof and never going to buckle, now housing speculation has started to find out what happens when doubt is added to speculation. They raised prices on how they felt, not what they physically offered. “I feel like the market is different this time so here is a million dollar mold infested dumpster with no windows.”

  10. R2D2 says:

    And yet Tesla is back up to $303. This market is just for the insane; let’s hope a crushing crash will cure all the insanity, and bring all the idiots back to reality, profit, and value investing.

    • Bet says:

      TSLA has a small float of 168 million , thats why… Those small floats are in the end dangerous when the love is gone, just not yet

  11. AAII also shows more bears than bulls. Is this the year of the great credit squeeze that never happened? 2016 redux I believe.

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