With mom-and-pop investors essentially out of stocks, buying has been left to a shaky combination of foreigners and company buy-backs that has kept the 2012 market rally afloat.
While it's no secret that the retail crowd has ditched equities for bonds, the entry of overseas buyers—as well as companies escalating stock buybacks—are relatively new developments that could help put a floor under market sellingover the long term.
In the near-term, though, the absence of both average investors and corporate insiders threatens to topple the market even further off its early-April high.
"Individual investors have been net sellers, measured by the flows of mutual funds that invest in U.S. stocks. They have been selling for 12 straight months," notes Jeff Kleintop, chief market strategist at LPL Financial in Boston. "Individual investors as a group wield far more buying power and influence over the marketplace. When individual investors make up their minds, they can be a powerful and durable force in the markets."
Foreigners bought $10 billion in the first quarter — historically a low number but a change from the selling that took place in the second half of 2011, according to Treasury data.
Conversely, corporate insiders are selling more than seven times the amount of stocks they are buying, according to Argus Research. New stock buybacks have averaged a comparatively low $1.2 billion a day in the second quarter, TrimTabs reported.
Individuals remain too in love with bondsfor now to help change the market's immediate prospects.
"It may take a period of rising interest rates from near historic lows to demonstrate the potential for losses and volatility that bond investors in the late 1960s and throughout the 1970s experienced to reverse the individual investor money flows back to stocks," Kleintop says.
The main driver of bond markets these days, though, is that fixed income continues to come under the dominance of Federal Reserve policy, which is unlikely to change in the next two years.
As long as rates stay near zero, investors remain wary of bucking the Fed and its mostly dour forecast for economic recovery.
"You probably need a combination of things to trigger any kind of meaningful move out of bond funds and into US equity funds," says Liz Ann Sonders, chief market strategist at Charles Schwab in San Francisco. "It would have to be a combination of rising yields and a continued much better economic environment."
Until that happens, Sonders sees investors moved by fears that the sovereign debt crisis in Europe could be presaging another market meltdown akin to what happened when Lehman Brothers collapsed in September 2008.
"There's still so much skepticism or skittishness on the part of investors, that a 4 percent correction we had wiped out all of the optimistic sentiment," she says. "It's muscle memory from the 2011 and 2010 corrections."
Strategists like Sonders and Erik Davidson, deputy chief investment officer at Wells Fargo Private Bank in Denver, are left to convince clients that corrections are a healthy and normal part of market ebb and flow.
"We have to look at where we are today in the context of where we've been in the last five years. There is this post-traumatic mindset. We've all been shell-shocked," Davidson said. "This is the worst market and economic environment that most living Americans have seen. As a result, everyone is on pins and needles."
Davidson points out that corrections — technically defined as drops of 10 percent or more — happen about once a year on average. Bear markets — a 20 percent drop — occur every 40 months or so.
"That doesn't mean you get out the market," he says. "It just means you need to be prepared from a portfolio standpoint but probably more importantly from an emotional standpoint."
Though it doesn't sound very glamorous, Davidson advises his clients maintain balance not only in stocks but also across asset classes, with allocations to high-yield corporate bonds, emerging market stocks and commodities.
Investing choices have been tough since the market slide began.
Companies with the largest share of their businesses coming internationally have fallen more than 11 percent since the selloff began. At the same time, the stocks-are-cheap theme hasn't worked, with shares having low price-to-earnings numbers tumbling 11.4 percent, according to Bespoke Investment Group.
Sonders, though, sees a "garden variety" stock slump of up to 10 percent, followed by a rally.
"What we have now is quite a bit different from last year or the year before. There are many more positive offsets in terms of the U.S. economy," she says. "In the middle- to long-term, the past of least resistance is unquestionably up."