There's been a notion out there for a long time that “the little people,” retail investors, are somehow not all that savvy. CNBC Executive Producer John Melloy debunks the myth, “On Wall Street, the retail investor is often seen as the dumb money. By the time Main Street has caught into a bullish or bearish trend, it's time for the so-called smart money—the professionals—to do the opposite.” But, as Melloy goes on to say, those days maybe over.
In creating the Investor Movement IndexSM (IMX), TD Ameritrade has leveraged one of the largest individual-investor databases in the country representing data from over six million clients to show how regular investors—like you and me—are positioning themselves in the market. While it cannot predict the direction of the market, insights from the IMX data, when viewed over time, can be used to suggest a bullish or bearish sentiment on the part of retail investors and might help investors gauge a range of trading decisions for both the present and the future. [Just remember that no single indicator or study tells all. It's a good idea to monitor a variety of indicators and studies when considering an investing decision.]
The Ultimate Sentiment Indicator
The calculated value of the IMX is based on a complex formula in which the holdings and positions of TD Ameritrade account holders are evaluated monthly to arrive at an individual score. The median of these individual scores represents the IMX, whose first purpose is to show, over time, how one of the largest active-investor populations in the United States reacts to, and adjusts for, unexpected events.
The IMX score is best viewed each month relevant to its prior levels. So a score that moves up from one month to the next could be interpreted as TD Ameritrade clients becoming more bullish. Likewise, a score that moves down from one month to the next could be interpreted as TD Ameritrade clients becoming more bearish. Keep in mind that this is not a mean-reverting index like the CBOE's Volatility Index (VIX), so there are no bullish or bearish “thresholds.”
Preliminary results have proven interesting. In December of 2012, during the “fiscal cliff” doom-and-gloom headlines, the IMX rose to its highest level since January 2012. Despite all the market uncertainty, the “unsavvy” Main Street investor appeared to be dialing up risk, buying equities, increasing margin, and trading options. Ultimately, the S&P 500 index rose, just as an end-of-year deal prevented any real government catastrophes. Yet, that increase in the S&P 500 index has continued well into January.
Fancy Tools For Plain Folk
You might wonder how this differs from VIX, which also measures market sentiment. Whereas, VIX analyzes implied volatility on S&P 500 index options, IMX goes a bit farther. As a precise tool, it pulls institutional traders out of the equation to laser in on the temperature of individual investors (you and me)—giving you a truer sense of what us little people are thinking, on the whole. But unlike the VIX, it updates once a month, not on a tick-by-tick basis.
Access IMX at tdameritrade.com/IMX to get charts, commentary, and to sign up for email alerts each month the IMX is updated. Or fire up your thinkorswim® Charts and type $IMX in the symbol field. You can overlay studies, or compare IMX to other symbols.