US Markets: What Small Investors Fleeing Stocks Means

Monday supposedly should be my rest day and thus I usually refrain from making any post.

However this development is simply too compelling to ignore.

This from the New York Times,

Investors withdrew a staggering $33.12 billion from domestic stock market mutual funds in the first seven months of this year, according to the Investment Company Institute, the mutual fund industry trade group. Now many are choosing investments they deem safer, like bonds.

If that pace continues, more money will be pulled out of these mutual funds in 2010 than in any year since the 1980s, with the exception of 2008, when the global financial crisis peaked.

Small investors are “losing their appetite for risk,” a Credit Suisse analyst, Doug Cliggott, said in a report to investors on Friday.

One of the phenomena of the last several decades has been the rise of the individual investor. As Americans have become more responsible for their own retirement, they have poured money into stocks with such faith that half of the country’s households now own shares directly or through mutual funds, which are by far the most popular way Americans invest in stocks. So the turnabout is striking.

Retail investors are usually called the OPPOSITE of smart money.

That’s because they signify as the extreme of the crowd actions-the HERD.

They usually account for as the frenetic buyers during the euphoric top and panicky sellers during market depressions.

Thus, massive moves by retail investors could likely herald signs of INFLECTION points.

In this case, US retail investors have reportedly been FLEEING stocks and BUYING bonds. I’d suggest that, like always, they are wrong and betting against them (in stocks) would likely be a profitable exercise.

As a caveat, it wouldn’t be prudent to bet against them on bonds, that’s because they’ve been backed by the printing presses of the Federal Reserve. However, once inflation starts rearing its ugly head, then that would be time to pounce on them.