Retail Cash AllocationsRetail investors think what now in 2013 about equities? Wall Street geniuses and the financial media often consider retail investors the “dumb money.” They tend to buy high and sell low. Is the dumb money really dumb?

This is ironic, because Wall Street and the media are notorious for dishing out group think advice that’s getting many of the small guys burned. There’s plenty of data that shows that a plain index investing or index ETF investing approach (the real “dumb” buy and hold a basket of stocks approach) handily beats the returns achieved by Ivy League educated mutual fund managers that engage in actively buying and selling. Generally it’s when the retail investor gets into the “trading mode,” is when they get into trouble. So what are they up to now?

One of the best measures of retail investor’s appetite for stock is the asset allocation poll conducted by the American Association for Individual Investors (AAII). In their latest monthly survey, retail investors increased their equity and bond exposure, while decreasing their cash levels. Variety of investors have used the “plenty of cash on the sidelines” phrase over the last few quarters, however the survey shows that cash levels remain extremely low – at least for the retail investor. At present, there have been no major catalysts to trigger a sell off and force retail investors to raise cash levels like in 08.

When looking at the AAII, of the retail investor in the thumbnail, in short the retail investor is fairly fully invested today. But what does this indicator tell us about the future? This indicator is not that good at predicting market highs, but fairly accurate about predicting market lows. The AAII rises as markets decline, peaking near 40% at market lows. The indicator hovers around the 20% mark, during market up swings. So the good news if you are a bull, is that this indicator does not indicate a falling market. The bad news is, the AAII is at near lows and this situation could change at any moment.

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Blue Point Trading Market View – June 13, 2013

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