Philosopher George Satayana once said, “Those who cannot remember the past are condemned to repeat it.” When it comes to the market, retail investors have been guilty of this transgression time and time again by getting into the market at precisely the wrong time.
According to Charles Biderman, chairman of TrimTabs Investment Research, “mom and pop” retail investors could be at it again. His firm, among other things, tracks inflows and outflows of cash in the market. As the market pushed to new highs in the first quarter, it appears individuals investors that were trying to ignore the market that once burned them, came back because of the allure of higher returns.
“Individuals put money into the market the first 4 months of the year, as they usually do, and not in the last 8 months,” Biderman says, though most of this money flow is for tax-oriented reasons. Using TrimTabs flow data, Biderman claims the inflow into equities this year hasn't been “money leaving bonds, but it was money leaving checking accounts; instead of putting money into the banks, using that money to buy stocks.”
TrimTabs research shows that as $51.9 billion flowed into U.S. mutual and ETF funds in Q1 (the highest since Q1 2004), savings deposits slid 66% from previous quarter, and were down 51% compared to Q1 2012.
The markets cooled off after a blistering Q1, with this week alone revealing a desire on the part of traders and investors to seek safety and cash out. In fact, CBOE Volatility Index (^VIX), aka the “fear gauge," has jumped nearly 20% so far this week, indicating bearish bets are gaining traction.
Despite the recent dip, Biderman believes Federal Reserve stimulus is enabling this market to push higher. “The Fed is creating $4 billion a day via keystrokes, $85 billion a month." He says the Fed is using that money to buy “fake assets, and as that $4 billion a day goes into the system, there’s more money looking to buy other assets, so prices of everything go up as long as people believe the $4 billion of fake money is real money.”
Investors who missed out on the early stages of the current bull market may try buy in late as QE remains in place. Biderman’s parting advice to investors who decide to ignore the history of market tops and buy now is to tread carefully, because once the Fed stops pumping liquidity into the system, or the market believes the Fed’s policies are no longer effective, retail investors like mom and pop will be the ones left holding the bag.