Where Have Investors Gone?

By: Sy_Harding

As Pete Seeger might have written it and the Kingston Trio might have sung it in the sixties, ‘Where have stock investors gone, long time passing? Gone to bond funds every one, long time ago.’

Will the last lines to that great folk song also become part of the picture? “When will they ever learn? When will they ever learn?”

I bring that up given that investors are still largely missing from the bull market. And as I wrote in my daily blog a few days ago, statistics show that most investors who lose money over the long-term do so because they become fearful after suffering big losses in a bear market, swear off “the damned market for good”, and don’t become interested again until the next bull market has been underway for a long time. They then pile in with abandon in an effort to catch up after the bull market has just about run its course, and the next bear market is due. The cycle then repeats.

We seem to be at a point now where investors have sworn off “the damned market for good”. As one participant in a website discussion put it this week, “Most people I know in their 50s and 60s are done with the market – period. It could go up another 300%. They don’t care. With bonds at least we can sleep at night.”

Will they be right this time?

In the past they have stuck with that thought for quite some time, often several years, until they learn how much their friends and neighbors have been making in the stock market again.

Investors continued to pull money out of the stock market well after the 1973-74 bear market had ended, after the 1987 crash, after the 1990 bear market, and certainly after the 2000-2002 bear market. As money-flow research firm Trim Tabs reported, “After the 1987 crash investors pulled $20 billion out of equity mutual funds, and then made the opposite mistake of putting $22 billion back into the stock market only a year before the 1990 bear market.”

The pattern was never more clear than in the recent bear market, and new bull market.

Most investors, believing themselves to be buy and hold investors, held on most of the way down in the severe bear market. A record amount of money flowed out of equity mutual funds and into bond funds not near the top in 2007, but between November, 2008 and the end of the bear market in early March, 2009. In fact, the panic to get out of stocks and into bonds during the final four months of the long bear market created an unusual spike-up bubble in bond prices in late 2008 (which then burst, with bond prices tumbling 19% last spring, and still not recovered).

The exit from the stock market has continued even as the stock market rally off the March low turned into a new bull market. (A bull market is defined as at least a 20% gain over a period of time).

As Dan Sullivan of The Chartist newsletter notes in his current issue, “Between July 31 and November 30 investors pulled $36 billion out of domestic equity funds, and pumped $142 billion into taxable bond funds. Since November 30 through the end of the year they pulled another $10 billion out of domestic equity funds while putting $35 billion into bonds.”

As Sullivan continues, “Obviously the public is not aboard this bull market. Investors on the sidelines view the rally with great suspicion, wondering when the next shoe will drop, with the bear market reasserting itself. However, they will come back, as they always have.”

The absence of public investors has not prevented a strong bull market, rising on very low volume, as financial publications have been noting. On average not much more than one billion shares have been trading daily on the NYSE for some time, compared to close to two billion in previous years, and as many as three billion daily in some periods when investors decide it’s time to really pile in.

So the beneficiaries of the new bull market have primarily been professional traders, and professional investors at hedge funds, banks and other institutions. In fact, banks have been reporting large profits due primarily to their trading and investments, even as their loan losses pile up.

There is a ton of money pulled out of the market, on the sidelines in money market funds and bonds. It was hoped that the new year would see volume pick up with some of that sideline money coming in. But so far it hasn’t happened.

Meanwhile the bull market has continued in its stealth mode of slowly creeping higher on very low volume, just enough negative days to keep wary investors wary, participants still slowly making gains even as sideline money doesn’t budge.

After such a dramatic run-up off the March low the market is probably due for some profit-taking and at least a short-term pullback. One indication is that so far the market is not responding positively to even big earnings surprises (like Intel and JP MorganChase’s) as the important fourth quarter earnings reporting period gets underway. A short-term correction would likely convince the sideline money that it has it right this time, and even more reluctant to come off the sidelines.

And after two months of low volatility, with big daily moves in either direction absent, a return to frequent daily moves of 250 and 300 Dow points is also likely, not conducive to creating investor confidence.

So the next few weeks could be a testing time for both bulls and bears.

Sy Harding is president of Asset Management Research Corp, publishers of the financial website www.StreetSmartReport.com, and the free daily market blog, www.SyHardingblog.com.

© 2010 Copyright Sy Harding- All Rights Reserved

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