Via ConvergEx's Nicholas Colas,
What do retail investors do on volatile days like Friday’s 1.1% move lower on the S&P 500? Today we look at information from one very large online broker’s publicly available order flow to explore that topic.
The simple answer: they buy, and the predominant security type is single stocks rather than exchange traded funds.
The top three names from Friday’s action: Apple (2.6x better to buy, based on the number of orders), Netflix (1.1x), and Facebook (2.4x). The SPDR S&P 500 ETF is just off the podium in 4th place, with a 1.5x buy/sell ratio.
In the top 30 names traded, only Microsoft and Schlumberger saw net single-stock sell imbalances. Will retail always be there to catch the falling knife, or at least soften its fall? Hard to say, but for now this segment of investors seems to keeping the faith.
For many individual investors in the U.S., the Financial Crisis still casts its long shadow over their confidence in equity markets. Even though the S&P 500 has recovered all its losses from the 2007-2009 drop, barely half of Gallup respondents in their regular surveys on the topic report that they have “Any money invested in the stock market right now – either in an individual stock, a stock mutual fund, or in a self-directed 401(k) or IRA”. The exact numbers: 54% reported such ownership in April 2014 (last results) versus 65% in 2007 and 67% in 2002 (all time high).
While it’s tempting to chalk this shift up to the aging demographics of the baby boomer generation, that’s not a very satisfying explanation. Four quick points here:
First, any long term look at the return data for different asset classes shows equities have some role in a portfolio for anyone under the age of 68 (positive 10 year returns and an average life expectancy of 78 in the U.S.).
Second, the stair-step declines in Gallup’s self-reported ownership numbers correlate to post-bubble periods, with drops after the 2000 dot com bust and the 2007-2009 Financial Crisis.
Lastly, the response to Gallup’s regular “Do you think investing in the stock market would be a good idea or bad idea?” query shows a real lack of faith in equities. Since 2000, there have only been 2 times when the “Good idea” response registered over 50%: 2004 and 2006.
The bottom line is that most Americans are still quite cautious about investing in equities, and its not just their age giving them pause. They seem to see the volatility of the last 15 years as a fundamental impediment to lasting confidence in U.S. stock markets. For an asset class that requires patience to reap any substantial rewards, that’s a tough hurdle. Too tough for many, it would seem.
But what about those investors who are still invested in U.S. stocks – that slim 54% majority with money still in the market? For them, the story seems quite different than for those who’ve turned their backs on stocks. Either they have a different psychological makeup from their peers, or perhaps their experience with stocks is more rooted in the gains of the past five years than the churn of the last fifteen.
Take as a mini case study the action from Friday’s sell off. I regularly look at the daily trading trends available on one large online broker’s website – Fidelity’s retail portal. The data posts every day in real time, so by the end of trading hours you have a snapshot of what this particular brokerage has seen in terms of order flow through the day. The top 10 names traded are visible to anyone with or without a brokerage account at the company – the remaining 20 names require an account ($2,500 minimum).
A few key takeaways from the data:
Retail investors still trade a lot of single stocks, rather than exchange traded funds. Of the top 30 names in terms of the number of orders, only 5 are ETFs. The rest are all individual company equities.
The top three names in terms of order flow on Friday were Apple, Netflix and Facebook. To give a sense of scale, Apple had 72% buy orders and 28% sell orders on Friday. Netflix was paired more closely, at 53% buy orders and 47% sells. Facebook orders skewed more to the buyside as well: 71% to 29% sells.
The ETF with the most retail interest based on this data was SPY, with 61% buy versus 39% sell orders. The only other ETF name in the top 10 is UVXY – the ProShares Ultra VIX Short Term Futures – with 30% of the order flow as buys and the rest as sells.
Taken as a whole, retail investors were net buyers of the top 30 names on this list during Friday’s volatile session. In terms of single stocks, retail was a small net seller of just two names – Microsoft and Schlumberger – and hardly in enough size to be meaningful.
Rounding out the Top 10 list (those available on public access to the Fidelity website): GE, Alibaba, American Express, AT&T, and Bank of America.
I know we can’t take one day – even a volatile one – and put too much weight on the data to extrapolate larger trends. At the same time, the long term is just a bunch of short terms strung together. Friday’s volatile action should have been exactly the kind of churn that spooks retail investors. There were, for example, very few satisfying explanations for the +1.5% drop in the S&P 500 through 2pm, or the 50 basis point snapback into the close. And yet, the data is clear: retail bought this dip.
It could well be that the last 15 years of U.S. equity market volatility has left only the “True believers” to buy and own stocks. They are fewer in number (or at least percentages) than during much of the last 2 decades, but they are still there. And they still believe in buying individual stocks. Now, we really haven’t had a large bout of market volatility in several years, so we don’t know if they will step in when the CBOE VIX Index reaches 20, or 30, or higher. But for now, they still believe.
