On Wall Street, the retail investor is often seen as the dumb money. As the thinking goes, by the time Main Street has caught onto a bullish or bearish trend, it's time for the so-called smart money – the professionals – to do the opposite.
Those days may be over, thanks to an index by TD Ameritrade being unveiled Tuesday.
The index measures the actual behavior of the largest pool of retail investors in the world, especially the firm's most active customers, rather than relying on questionnaires or old fund flow data like other sentiment indicators do.
"There's quite a disparity of what people say they intend to do and what they actual do," Steve Quirk, senior vice president of trading for TD Ameritrade. "This kind of bridges that gap."
Backtesting of the TD Ameritrade Investor Movement Index (as it will be called) seems to prove Quirk right.
At the start of December, as markets treaded water on fiscal cliff fears, the indicator shot to its highest reading since January 2012. So despite all the headlines, the active retail investor was ratcheting up risk, buying equities, options and ETFs–in some cases with leverage—that stood to benefit from a solution to the "fiscal cliff."
At that same time, equity mutual funds were showing heavy outflows. The American Association of Individual Investors–a weekly survey–showed 42 percent of those questioned were bullish, while 58 percent were either neutral or bearish.
The S&P 500 would go on to rocket higher as a "fiscal cliff" deal was hatched just in the nick of time. The benchmark for U.S. stocks hit a five-year high last week, extending the bull market and proving that the bets on the index's move higher were quite prescient.
"The whole notion that it's profitable to fade the retail client may be antiquated," said Quirk.
The monthly index measures accounts with $2,000 or more and whose owners have placed a single trade that month. Portfolios that trade frequently or use margin are "scored" with a higher intensity in the index.
This index is the start of a bigger effort by the firm to dive into the crowd-sourcing and social network space. This is a necessary move toward the future if TD wants to not lose market share from younger upstarts.
TD Ameritrade finished sixth in the annual ranking of online brokers by Barron's magazine, behind smaller and younger firms. (However, TD did finish ahead of the other big firms in the space like ETrade andFidelity.)
The next iteration for TD Ameritrade, sources at the firm said, will be for users to be able to see which individual stocks and ETFs others hold. Also, that data will be aggregated so traders can see how their portfolio stacks up to others.
For example, you would be able to enter someone with your same age and risk profile and see which stocks and funds they own. Perhaps even track their moves.
The social networking arena is the next big push for online brokers like TD, as they strive to get more traders, especially younger ones.
This index is just the beginning for one major player.
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