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Actions Speak Louder Than Surveys for Retail Investors

December 8, 2014
Actions Speak Louder Than Surveys for Retail Investors

Retail investor sentiment is a hot mess of conflicting information. They’re bullish. They’re bearish. They’re all over the place. But why should we even care what they think?

Well, this is a market driven by supply and demand. Let’s take a stock like Apple (AAPL). On any given day, clients at TD Ameritrade represent about 10% of the total trade volume in Apple stock. If you extrapolate that out across all the major online investing firms, retail investors probably represent over 40% of its total volume. This means retail investors have a meaningful impact on the direction of Apple’s stock. But how do we ascertain their sentiment?

Is Investor Sentiment Like the Truthiness of a Tinder Profile?

Perhaps the most well-known source of investor data is the American Association of Individual Investors (AAII) Investor Sentiment Survey. Stay awake, because this gets good. Members of AAII go to a website and respond to a single statement: “I feel that the direction of the stock market over the next six months will be: Up, Down, or Neutral.” On average only 300 investors share how they “feel” about the stock market in this survey. To take stock in this survey you would need to buy into two things: 1) that 300 is a statistically significant number, and 2) those 300 people are “acting” on how they are “feeling.”

And there’s the rub. You and I both know that’s not reality. Someone may “say” that they are 6’5” and smoking hot on their Tinder profile. But often, in real life, they are actually 5’6”, living in their mom’s basement, and boast a healthy paunch (thanks to a steady diet of Cheetos).

IMX is Where the Rubber Meets the Road

And that’s why we care what retail investors are actually DOING. Every month, TD Ameritrade releases the Investor Movement Index (IMX). This sophisticated index looks at the actual trading behavior of any of our firm’s 6.3 million clients who placed a bona fide trade in that given month. On average, that nets out to several hundred thousand individual investors. (Slightly more significant than 300, wouldn’t you agree?)

The IMX looks at all the ways an investor can increase market exposure. Are they moving out of cash? Into margin? Into higher-beta stocks or leveraged ETFs? Or, are they increasing the use of options? And here’s what we’ve learned: TD Ameritrade’s clients have been increasing their equity market exposure every step of the way in the face of this three-year bull market rally. That is, until just recently.

Less Risky Business

For the first time since May 2013, our TD Ameritrade client base has demonstrated two consecutive months of a decrease in overall equity market exposure. Their overall sentiment declined. But get this—our clients were net buyers overall. They were putting more money into the markets, but their investments, on the whole, were less risky than in months past. So as the markets have continued to push to unprecedented highs, our clients are fully participating in the rally but they have exercised caution. There’s been a documented two-month trend of flight to quality. Doesn’t that just smack in the face of everything you’ve ever heard about retail investors being the dumb money?

So, let’s get down to reality. For starters, let's compare the AAII Investor Sentiment Survey results compared to the IMX (see figure 1).


FIGURE 1: RETAIL DIVERGENCE Two gauges of retail investor sentiment, the AAII index (blue line) and the IMX (green) went in opposite directions in late 2014. Source AAII Investor Sentiment Survey. For illustrative purposes only.

Because the AAII survey results are weekly, I averaged the totals across the course of the month. As you can see, what people say they are doing is pretty volatile. But if you look at the IMX, what they actually are doing is react fairly consistently, especially when compared to the Standard & Poor's 500 Index (see figure 2).


FIGURE 1: RECORD MARCH. Despite wide swings in market sentiment, the S&P 500 Index (SPX) generally climbed over the past four years. For illustrative purposes only.

Another thing that stood out to me: compared to months past, we’ve seen a decrease in trading of momentum stocks. I think that makes perfect sense. To the extent that retail investors are concerned about a potential correction, general consensus is that the momentum stocks will overcorrect.

Retail as the Smart Money

What did our clients buy? The most popular stocks were Alibaba (BABA), Disney (DIS), and GoPro (GPRO). But our clients were also net buyers in shares of oil-producing companies that saw their valuations drop in the month. They bought Transocean (RIG), BP PLC (BP), and Halliburton (HAL). On the surface, that might seem like it’s not the best move in the world, but there could be another way to look at it. Many of these are lower-beta stocks, which are typically more stable, less risky picks. And, without question, oil is under pressure. But this could be viewed as a valuation/dividend play.

Now we need to ask: what were retail investors selling in November? They were net sellers of popular names that saw price appreciation in the month: Whole Foods (WFM), American Airlines (AAL), Cisco (CSCO), and Citigroup (C).

IMX is the Real Deal

Now you can see why we built this index. The IMX gives a view of reality with empirical data that shows what retail investors have actually been doing.

I think retail sentiment matters. From what we saw through the IMX, retail investors were net buyers of the market in a month that the S&P 500 increased. But they exercised defensive moves, taking profits by rotating out of stocks with high price appreciation into lower-beta, high-yield stocks.

So while we’ve noticed two consecutive months of some trepidation on the part of retail investors, the question for the near future becomes: “will they get their Santa Claus rally?” Their actions suggest that they are cautiously optimistic and we can all watch the December IMX for confirmation.

Talk soon,



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