The Current Rally Should Continue Until Retail Investors Are Sucked In

I'm currently long this market even though there are clear signs of a slowing economy. First, let me clarify my thinking on the recent retail sales report, which on Thursday was supposedly the trigger of a triple digit Dow decline. Although April’s number was a much below anticipated -2.3%, March’s was a very strong +6%. I believe the proper way of accounting is to take a two months average due to the early Easter, which leaves a +1.85% per month nominal growth. The number shows weakness in the consumer sector: even if you believe the CPI accurately reflects inflation, retail sales declined in real terms. Nonetheless, the number does not (yet) spell doom and gloom as many bears would have you believe.

At any rate, the market may and does act quite independently of the real economy. The Dow, which has been leading the charge, it safely retreat to the 13100 level without violating the most recent power-up trend.

One thing that convinces me that this bull market has one more leg in it is the lack of retail investor participation which is reflected in the behavior of the online brokers like ETrade (EFTC) and TDAmeritrade (AMTD). In the 1-year chart, they both notably underperformed S&P and XLF (the financials ETF). Zero-commission brokers that should be siphoning off business from these two did not appear untill this year, so the weaknesses in EFTC and AMTD do appear to be a reflection of lack of conviction on the part of retail investors who're invariably the bag-holders. Right now I don't expect this rally to end until they are sucked in.

On shorter time frames, AMTD especially has been perking up, which may indicate some shift in psychology. At any rate, buying begets more buying, if (or when) the S&P makes a new all time high, I expect people will come back to the stock market en masse.

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To be perfectly clear, I’m in the camp of a mild recession coming later this year. The lackluster personal consumption numbers sealed the deal for me. But I fully expect the pundits to be talking up business CapEx spending and a possible rate-cut, as they always do. That said, I’m not going to pick the top - instead I'll let the market tell me when to get out.

Comments

[Malkiel:]

The retail investor is already in this market--who do you think owns all those mutual fund shares? Most retail investors have accepted the wisdom of doing their investing in tax-deferred retirement accounts and are dutifully having their automatic deduction taken out of their paychecks twice a month and deposited into whatever mutual funds they've checked off with their 401k plan. The adventurous few who buy in a taxable account are still sitting on last Fall's purchases in order not to get hit with cap gains losses of 15% based on their 28% average tax bracket. So don't expect to see any panic buying from mom and pop, expect to see it from their fund managers...

2007 May 14 05:16 PM

[Solution:]

Almost every analyst on TV, news paper, this borad are bullish. It seems to me that they want to talk the retail investors out while taking profit on their own money. What a dirty world !!

2007 May 14 09:27 PM

[Will Hayes:]

This is a total momentum trade, but I agree. Listen to the market. Let it do your thinking for you. Usually, when I trade a personal opinion it is expensive. That being said, if we come off a volume spike up day, I'm buying QID.

2007 May 15 10:22 AM

[elwind45:]

The retail investor has so many more low cost options to investing these days. I find it novel that the pros panic ( such as in feb) and denied it ever happened. The amount of treasury money needed to bail the pros out was massive. This is the funny money the pros are playing with now. Wall street will bail out soon, not wanting to lose the bonuses they so clearly have made this year. Katie will have to bar the door again soon! So, the little guy will be left holding over priced shares, in a flat to down market until middle of next year.

2007 May 16 04:45 AM

[Richard Dommer:]

The US retail investor may not be at the punch bowl with cups in both hands but there appears to be a pretty big party going on in China. Could this pose a risk for the US equity markets?

www.marketwatch.com/ne...
>

2007 May 19 08:38 AM

[Richard Dommer:]

excerpt from above linked story ...

The participation of domestic retail investors in the Chinese equity market has gone through the roof. The total number of domestic individual equity accounts was 94 million, or over 7% of population, as of April 30, according to Goldman Sachs. In contrast, only 5% of the population had equity accounts in 2001.

"Moreover, new account opening is accelerating at a lightning pace--new individual account openings on April 30 alone exceeded 1 million, and total new individual account openings in April exceeded the sum of [those opened in] 2005 and 2006," said Goldman Sachs economist Hong Liang in a separate research report Thursday. "As a result, about 17% of the total existing accounts were opened just in the past 4 months."

2007 May 19 08:44 AM