Joe Kinahan, Chief Derivatives Strategist, from TD Ameritrade presented a very interesting indicator based on investor sentiment. I have often referred to sentiment indices of individual investors, traders and financial advisers as a contrary indicator. When sentiment readings are overly optimistic, it has bearish implications. Likewise pessimistic readings infer a bullish trend. The rationale is that when investors are overly optimistic, they are "all in" and there are fewer of their kind on the sidelines available to influence the up trend.
Mr. Kinahan's indicator, the Investor Movement Index (IMX), takes a slightly different approach. The IMX is a proprietary, behavior-based index that reflects the mood of retail investor portfolios (i.e.) TD Ameritrade's core business. It is worth noting that TD Ameritrade has over 6 million accounts so their sample size is broad. Using a proprietary methodology, they sample their vast array of accounts, both large and small, and assess what their investors are actually doing. Historically market mood indicators have largely been based on surveys. The IMX captures not what investors are saying but what they are actually doing.
When he presented the IMX (click on attached photo), the index showed very sympathetic movement with the S&P 500 over the course of the last 3 years. The IMX and the S&P moved in unison with the IMX lagging slightly behind. What caught my eye was a very clear divergence that occurred in the first quarter of this year. In the first quarter of 2013, though the S&P 500 continued to go higher, the IMX went decidedly lower. I noted this on the photo with the red arrow indicating the divergence. Kinahan opined that the divergence was actually a good thing for TD Ameritrade's clients since it showed that they were taking profits. That is certainly one possible conclusion. I would also add, that the recent rally was being fueled by corporate stock repurchase programs and purchases by other large players. My interpretation of the IMX's divergence is less sanguine than Mr. Kinahan's. The rush for the exits by retail investors adds to my concerns expressed in this article I published a few weeks ago.
Kinahan concluded his presentation with his belief that investors are becoming more like traders with a great deal of movement in and out of the market. This is likely due to the advent of electronic trading that has leveled the playing field for market participants. These electronic platforms give investors more information than professionals had 25 years ago. That said, Kinahan advised attendees to start small if they intend to do their own trading. Doing your own trading requires a great deal of discipline and good health so Kinahan's message of starting small makes perfect sense.