Retail investors took profits in July on fears about the Federal Reserve's exit plan from its monster monetary stimulus, with the group showing the lowest sentiment reading since January, according to data culled from the largest pool of retail traders by TD Ameritrade.
The firm's proprietary "Investor Movement Index" released Monday showed a 4.87 reading, down from a bullish 5.15 reading in June. They were net sellers of equities last month, especially in shares of 2013 highfliers like Hewlett Packard, Cisco and Time Warner Cable.
"I think its taper fears," said Steve Quirk, senior vice president of TD Ameritrade's Trader Group. "The investing public is not stupid. They know it's coming and this is probably a point that if you've seen appreciable gains, you should start to take them off the table."
The S&P 500 jumped to a record high last week as a solid, but a not super jobs report gave professional investors the impression that the Fed could hold off from dialing back bond buying (QE3) in September/October. Or at the very least, according to their thinking, the economy is now strong enough to handle it.
TD uses a formula for its index that weighs active traders more than less frequent buyers and sellers among its 6 million funded accounts. The firm releases this unprecedented look into client activity in an effort to create a sentiment reading that is more of a leading indicator, rather than a contrarian "dumb money" measure which many on Wall Street feel retail sentiment indicators have become.
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This profit-taking behavior at record highs is not what you've typically seen from the retail investors, often referred to as the uninformed herd on Wall Street. These moves are more akin to leading hedge fund manager Daniel Loeb, who took profits in his winning Yahoo position last month despite many of the catalysts he cited for buying the stock not yet coming to fruition.
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Besides that negative reading back during an uncertain January, the so-called IMX Index plumbed the 4 level during the summer of 2012, which was plagued by worries about the so-called fiscal cliff and an unstable Europe. Dysfunction in Washington and Europe are often mentioned by pundits as additional reasons to be negative for this year's second half.
Still, TD Ameritrade's peek at client activity raises the question: If the market is going to continue to march higher, can it do it without the retail investor participating?
—CNBC's John Melloy.