Thursday, May 1, 2014

A warning from the retail investor?

Macronomics highlighted some interesting fund flow statistics from the BoAML's client flows. It seems that institutional investors have been consistent size sellers of equities; while hedge funds had been sellers since late last year but recently started to buy; and individual investors have been buying stocks like they were Black Friday door-crasher specials. Bear in mind that when institutions change direction, they move glacially but move tends to be long lasting, while hedge fund and retail investor money tends to be much more nimble.

Other data sources have confirmed the individual investor stampede. TD Ameritrade maintains an Investor Movement Index (IMX) which measures individual investor activity. While the latest numbers are only to the end of March and the April figures will not be updated for another week or so, the readings from IMX also confirms substantial net individual investor buying. March 2014 IMX levels are now at all-time highs since the inception of the index and, if the BoAML data is accurate, April will show further highs indicating more buying.

Ryan Detrick made one observation about the progression of margin debt as how it relates to the net speculative activity of individual investors:
High margin debt by itself isn’t bearish.  In fact, new highs in margin debt usually have marked very strong stock markets (think the past 12 months).  The catch is once margin debt is high and it ROLLS OVER, then you better start to worry.
The latest observation shows that margin debt has started to roll over:

I am not going to make trite comments about who the smart money or the dumb money is. but when you add it all up, does this sound like a warning about the level of risk in equities?

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). The opinions and any recommendations expressed in the blog are those of the author and do not reflect the opinions and recommendations of Qwest. Qwest reviews Mr. Hui’s blog to ensure it is connected with Mr. Hui’s obligation to deal fairly, honestly and in good faith with the blog’s readers.”

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