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Regular Investor Back Just in Time For Selloff

Retail trading activity has picked up by as much as 20 percent this month, according to an analyst report, just in time for the market's biggest weekly loss in three months. Institutional investors who lifted the market to a new 2010 high last week are now 'selling the news' as the Federal Reserve begin its quantitative easing program of buying Treasuries Friday.

"Our channel checks suggest that daily average revenue trades for mass-market oriented online retail brokerage firms are running 10 to 20 percent ahead of average October levels through the first nine trading days of the month," said Patrick O'Shaughnessy, a Raymond James brokerage analyst, in a note. "The early data appears to show a continued re-engagement on the part of the self-directed retail investor."

The data triggers a debate on trading floors as to whether this pick-up is a good sign for the future of the bull market. The regular investor piled into bonds even as stocks rose more than 80 percent off their March 2009 low, so some would argue retail participation — following zero involvement — is the final piece to keep propelling this market higher. While contrarian traders will argue that by the time the retail investor jumps in headfirst like this, it's time to sell, at least for the short-term.

A widely-watched weekly poll of individual investors surged this week, driving many traders to take profits on concern the market was way too overbought. The number of bullish participants in the American Association of Individual Investors' survey jumped by 9 percentage points to 57.6 percent this week.

The S&P 500 is down more than 2 percent this week after Cisco warned that demand was not as strong as it previously thought and as investors raised questions about effectiveness of the second round of quantities easing from the Fed.

Contrarian indicator or not, for the retail brokers, the rising activity is a positive development. O'Shaughnessy sees TD Ameritrade and OptionsXpress as the biggest beneficiaries because they get the largest portion of their revenues from trading commissions.

"This is a positive sign that we tend to attribute to a less volatile and rising stock market, combined with election and post-election portfolio re-allocation activity," said the analyst.

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