No One Buys Retail Anymore
When is the last time you got a stock tip from a cab driver or chatty not-in-the-business neighbor? It’s probably been the better part of a decade, if not longer. Yes, that’s probably the most bullish argument for owning stocks just now, but, as ConvergEx's Nick Colas notes, it also raises a question. What investments are retail investors considering, exactly? Various online tools and resources provide some answers. From Yahoo! Finance’s analysis of number of requested price quotes last week: AAPL, BAC, TSLA, INTC and CALL. From Google Trends: AAPL, GOOG, and YHOO. And from one very popular online brokerage for today’s volume: AAPL, F, BRCM, BAC, and NUGT. Whether this interest indicates a top or a crowded momentum trade is in the eye of the beholder, of course. But in a light volume period like summer, Nick notes, tracking individual investor attention can be an important piece of the day-to-day trading puzzle.
Via ConvergEx's Nick Colas,
In the 1980s many investment professionals – portfolio managers and analysts, for example – did not have access to real time stock price information. Quote machines were for traders. They were expensive and only someone actively involved in buying and selling needed that level of information in their jobs. At the firm where I started my career, Alliance Capital, PMs and analysts had to wander out to the trading floor if they wanted to see where a stock was trading. They were explicitly banned from having quote machines in their offices, since their job was to think about “The big picture”.
Fast forward to today, and everyone has free access to real time quotes for any widely quoted stock, pretty much anywhere in the world. That’s the Internet for you – if you want a good burrito near the office or a plane ticket or a stock quote, it’s all available from your computer or smart phone. Yes, institutional investors use professional resources for price information and a host of other applications. But for “Mom and pop” investors and bunny-slipper-wearing home day traders, the Web is the alpha and omega of their search for investments.
As the recent kerfuffle about NSA data collection reminded us, what happens online never dies. And, increasingly, it gets analyzed in real time. Not just by government spooks, but by scores of companies which seek to get an edge by mining the “Big data” which the Internet seems purpose-built to deliver. Why should a smart institutional investor care about what the retail investor thinks? Here are three reasons:
1. Retail investors have a reputation for coming late to any party. All the good booze is gone and the caterers are packing up. This is most true for assessing general market direction. Anyone trading during the dot com melt up in the late 1990s can tell you stories about how cab drivers or know-nothing neighbors had scads of hot stock tips, right before everything went pear-shaped.
2. They can also be an important part of maintaining momentum in what “Real money” thinks is an overvalued name. Not to contradict point #1 entirely, but retail investors can provide important juice to a story stock. Consider that most mom-and-pops aren’t MBAs or business majors. They don’t know how to read balance sheets and they tend to focus on just a handful of household tech and other momentum names. They don’t use algos or other price-sensitive trading tools. They want, they buy, they wait. They respond to price action with a strong dose of emotion. Trading alongside this group can be a little like sharing a phone booth with a hungry bunch of ants while covered with honey. In the dark.
3. Retail can be on the leading edge of large macro shifts in investment products. While most options trading in U.S. listed stocks is now the purview of mathematically adept professional traders, it was not so long ago (a decade or so) that retail investors represented more than half the daily volume for this product. Exchange traded funds started in the 1990s in much the same way, with individual investors using SPY and later QQQQ (it had an extra letter back then) to gain exposure to a fast rising market. If you want to see the future of capital markets, it might well already be on the sheet of some $25,000 retail account at a discount online broker.
Google Trends is one of our favorite resources here, mostly because it comprehensively tracks in real time the number of online searches for specific keywords. And because it is free. Looking at the Trends data for a few basic investment terms yields the following observations:
Searches for the word “Stock” in the US yield the insight that fear is a much better motivator of retail interest in the stock market than greed. The number of searches for this term, which also encompasses related phrases like “Stock market” and “stock quote” peaked in 2008. Now, the number of such searches is at half the levels seen during the Financial Crisis.
This is, to the contrarian eye, a strongly bullish case for stocks. The history of this indicator (chart below) show that when the broad populace cares not a whit about stocks the market tends to rally. Further, a Google Trends map for where the searches for “Stock” originate shows that New York is the epicenter of current interest. Back out anything with a 100XX zip code, and general interest is probably even lower still.
Searches for “ETFs” also peaked during the 2008 market meltdown. When you look at the “Related searches” for this phrase, some nuances come to the fore. “Short ETF” is the second most popular search, followed by “Gold ETF”. These trump “Bond ETF” and “oil ETF” and betray some continued concern among the investing public over the durability of the current rally and the stability of the U.S. dollar and financial system.
Searches for “Stock prices” are in secular decline. The number of such searches is now less than half what it was during the 2004-2007 rally for stocks, despite the relative strength of the current rally versus that earlier move. Again, the contrarian would color that bullish.
Moving on to interest in single stocks, Yahoo! Finance publishes a weekly list of the five symbols which garnered the greatest number of stock price quote requests on their website. Strangely, this list is not always available, but happily they did publish one for last week. A few points here:
The top 5 names in terms of Yahoo! price queries for week ended July 19 were: AAPL, BAC, TSLA, INTC, and CALL.
I have no idea if that is bullish or bearish for these names, and you can obviously take the information in either direction. To quote the classic mockumentary Spinal Tap, “It’s such a fine line between stupid and clever.” Crowded trade or momentum builder? You be the judge.
There is some academic work on the subject of investor search queries and trading volumes (Bordino, Battiston, Calderelli, Cristelli, Ukkonen et al, 2012) which shows a strong correlation between the two. Not the direction of the stock, mind you, but just trading volume. If nothing else this work does underpin why it is important to keep tabs on retail investor interest. The authors point out that their data supports the notion that most retail investors trade only one or two stocks and they tend to move in packs when they do invest.
At least one very popular online retail broker publishes a real time list of the most popular names traded on their platform in the prior days. A few points on this data:
As of the writing of this note, the top names traded were AAPL, F, BRCM, BAC, NUGT (a 3x gold miner long ETF), T, CAT, NFLX, SRPT, and FB. Most were better to the buy side and all had at least 1,000 orders (not shares…) in each direction.
Among the entire list of 25 commonly traded names on this platform, only five were exchanged traded funds. They were NUGT, IVV, DUST, GLD and TNA. No clear buy/sell direction. On the whole this was surprising to me, as I expected most trading to be ETF focused. Still, on further reflection this made sense. If you are a trader, pro or amateur, you want to take positions which will move around enough to make some money. Most ETFs are engineered to reduce volatility...
Taking the entire list into consideration, this retail online broker’s clients were solidly to the buyside yesterday. In essentially a flat tape.
Now, I know most professional traders will discount the actions of retail investors, considering them “Dumb money.” This, I think, is a mistake. After all, if you find yourself in the same names at the same time, who’s to say you are so smart? Better to know more about what is going on in your names, rather than less. That’s what the “Smart money” does.