Retail Investors Have Taken Profits

Many investors were jolted into action following what has become known as the “flash crash” of May 6th, where the DJIA quickly lost nearly 1000 pts in a matter of minutes before recovering.  That was a day that will not soon be forgotten, and despite many pundits blaming such an occurrence on a glitch or a faulty trade the indexes fell to below that panicked level on Tuesday May 25th.  It seems there was more to it than just a glitch or faulty trade.  The return of stock market volatility after some relatively calm months may be exciting for some traders on Wall Street, but it new data shows that the individual investor is content to take some chips off the table here.  No doubt, many investors are still licking their wounds following the market’s meltdown following Lehman Brothers, and capital preservation is a very high priority.

Investors had about 60 percent of their portfolios in stocks, 20 percent in bonds and 20 percent in cash, according to a survey last month by the American Association of Individual Investors, a nonprofit investment education group in Chicago. That compares with an average recommendation of 8 percent allocated to cash from strategists at brokerages compiled by Bloomberg, including Bank of America Corp. and JPMorgan Chase & Co.

First Net Withdrawals

Investors pulled an estimated $14 billion from U.S. stock and bond mutual funds in the week ended May 12, the first net withdrawals since March 2009, according to the Investment Company Institute, a trade group in Washington. The Standard & Poor’s 500 Index has declined 5.2 percent this year and has gained 59 percent since the market low in March 2009. – Bloomberg.com 5/26/2010

The reasons for the skepticism are many, but likely the top excuse would be uncertainty surrounding the European debt situation.  From our view at Ockham we saw an important breakdown in various investor sentiment metrics recently; after spending the better part of a year at extremely bullish levels, we have seen sentiment fall precipitously in just the last three weeks.  One basic proxy we use for investor sentiment is the percentage of NYSE stocks selling above their 30-week moving average.  As of last week’s close, only 38% of stocks fit that criterion down from more than twice that level for nearly the entirety of the past year!

As our readers know, were had been calling for a pullback as the market was simply overheated according to our methodology.  We like to see the market from a contrarian point of view, and the mass exodus of the retail investor does seem like herd-mentality thinking (even if it is justified).  Of course, there are real risks in the current environment with European debt, high unemployment, and other headwinds.  However, the underlying fundamentals of the US economy have undoubtedly strengthened considerably over the last year, interest rates remains extremely low, and crude oil prices are falling just in time for summer (a break for consumers budgets).  Now with the market seeing a much needed correction, we think that a buying opportunity may not be far off assuming Europe can avoid the worst case scenario.

About Ockham Research 645 Articles

Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

We utilize this straightforward approach to value over 5500 securities, with key emphasis given to the study of individual securities' price-to-sales, price-to-cash earnings and other historical valuation ranges. Our long term value investing methodology is powered by the teachings of Ben Graham and it has proven to be very adept at identifying stock prices that are out of line with fundamental factors.

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