WASHINGTON, August 20, 2012 – In an article we noted in Yahoo Finance this morning, CNBC’s Jeff Cox wonders if the small investor will return to the stock market after the current end-of-summer holiday period reaches its end:
“After a summer of low volume and high gains, the stock market soon will face the challenge of whether it can sustain a rally once the crowd comes back from vacation.
A market that rallies without a lot of participation is generally standing on shifting ground, at least according to Dow Theory, which uses volume confirmation as a key tenet in testing strength.”
Gosh. We mean, like who knew? The little guy has been long gone from this market. After their 2008-2009 pummeling, whether in individual or 401(k) accounts, small investors grabbed whatever they had left, en masse, and headed for the exits, by buying gold, by dumping available cash into now-U.S.-guaranteed money market funds or FDIC-insured bank accounts, or by moving to reasonably high-grade bonds or bond funds. With less choices available, most 401(k) investors who weren’t asleep at the switch re-allocated the bulk of their funds to the fund-equivalents of what we’ve just listed.
Sure, a modest cadre of seasoned individual investors and day traders continued to struggle against market forces in the intervening years—with occasional success—but even here, many of these holdouts have been throwing in the towel and heading for the virtual exits.
After quoting a few of the usual talking heads—including tedious perma-bear Marc Faber who’s always trying to boost his own considerable short positions—Cox observes that “the unwillingness of retail investors to participate in the rally is striking.” But is it really? The Maven regards this retail buyers’ strike as a rational approach by small investors who’ve realized at last that a system that’s always been at least a little bit tilted against them is now actively hostile to their interests as well as to the over all critical interest in capital formation itself.
If you keep bringing home cartons of eggs from a store that later turn out to be cracked in places where you can’t see them, you tend to stop buying eggs from that store. It’s no big mystery, really. If you completely lose confidence in an institution, you’re unlikely to return to it again. That’s what’s going on here. And the damage is likely to be with the markets for a long time. Yet the powers-that-be are too shortsighted and self-interested to do anything meaningful about this sorry turn of events.
Back in the 1980s, when the Maven was actually in this business, the environment was reasonably good for the little guy. Granted, home gaming—i.e., investing on your own via your personal computer—was still somewhat in the distance. You had to work through a conventional brokerage firm or through one of those newfangled “discount brokers” like Charles Schwab and several others who’ve already been and gone.
But if you could avoid the obvious touts and doomed IPOs, you had half a chance of coming out on top more than half of the time. Even here, though, the system was being gamed by bizarre tax shelters and write-off schemes that were available to investors who knew about the metaphorical back room bazaars. Most of these, however, disappeared when the tax law was rewritten to eliminate such shelters, good and bad, from the realm of the small investor.
Nowadays, the whole system is gamed by one simple fact, one massive “Catch-22:” trading is now over 70% controlled by a massive combine of high-frequency trading via machine and/or diabolically contrived algorithms plus hedge funds. Quotes are falsified and manipulated to the point where a small investor’s PC is wholly incapable of detecting phony quotes, leading to various portfolio disasters. Brokerage firms and exchanges know this.
But now almost wholly rely on these silicon-studded criminal activities and the commissions they generate to pay the mortgages on the uptown Manhattan luxury penthouses their execs and high-paid traders still prefer to enjoy. Ergo, neither they, nor the government they own are going to crack down on this market-destroying activity. Which is eviscerating the market’s once-robust ability to attract new capital to new businesses since the average investor no longer is willing to participate.
Small traders and investors have, in short, “gone Galt,” and they won’t be back anytime soon until and unless some trust is restored to the market. But the longer this takes, the less likely the current generation of Boomer and X’er investors are ever to return. How great is that?
Cox quotes at least one individual who seems to understand what’s going on these days. “’The individual investor is still not in,’ said Keith Springer, president of Springer Financial Advisory in Sacramento, Calif. ‘At some point there could be some panic buying by some individuals if they gain confidence. But the average investor doesn’t believe in this.’” And why should he?
The market is fraught with danger these days. That won’t prevent a couple more good rallies should they choose to occur. But, with developments turning truly ominous in the Middle East, with this Administration apparently asleep at the switch for any activities that don’t involve trashing Mitt Romney or Paul Ryan, with Congress having entirely abdicated its responsibilities, and with the cost of gasoline again on a relentless rising trajectory—not to mention the uncertainty of this fall’s elections—the small investor’s most prudent course is still to avoid going all-in on anything.
We remain in some utilities and REITs, even though the larger investors who’d fled to them for safety are slowly dumping them. We simply don’t trust the rest of the market right now and will hold onto our yields, even at the risk of getting a little of our capital chewed up. Markets have just opened down this morning, and, with continued light volume, determining trajectory is simply going to be too hard until the Labor Day holidays are past and school is back in session.
Have a good week.
Disclaimer: The author of this column maintains several active trading and investment portfolios and owns residential and investment real estate.
Positions mentioned above describe this author’s own investment decisions and should not be construed as either buy or sell recommendations. The current market is highly treacherous and all investors travel at their own risk, so caution should be exercised at all times.
Illustrations, charts, commentary, and analysis are only the author’s view of current or historical market activity and don’t constitute a recommendation to buy or sell any security or contract. Views, indications, and analysis aren’t necessarily predictive of any future market or government action. Rather they indicate the author’s opinion as to a range of possibilities that may occur going forward.
References to other reporters, analysts, pundits, or commentators are illustrative only and do not necessarily represent an endorsement of such individuals’ points of view. If specific investment vehicles are mentioned in any article under this column heading, the author will always fully disclose any active or contemplated investments in said vehicles.
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