Despite the major indices at new all-time highs, the rate of participation among American investors has been declining. Consider that TD Ameritrade’s Investor Movement Index (IMX) has made a series of lower highs and lower lows since peaking at the beginning of March. During the last 6 ½ months since investor participation peaked according to IMX, the S&P 500 Index (SPX) has gone on to make a series of higher highs. It’s extremely rare that such an extended period of stock market gains coincide with declining participation. Normally new highs in the major averages bring in a flood of new money from investors hungry to get in on the action.
According to the latest data from the Investment Company Institute (ICI), equity market inflows continue to be pretty much non-existent much as they have been in recent months. The following graph shows total inflows to be hovering barely above the “zero” level. If ever there was a picture which captures the complete lack of interest in stocks among the public, this is it.
The principles of contrarianism tell us that stock market tops are unlikely to occur when public interest in stocks is at low ebb. Instead, major tops normally occur when the public becomes highly interested in stocks and has a big stake in the equity market. That certainly was the case leading up to the major tops of the last three decades.
It’s possible that the broad market rally after the Fed announced it would continue QE3 will kindle a revival of interest among retail investors. If so, we can expect to see increased money flows into equities and, in the not-too-distant-future, the corresponding market top that usually accompanies such widespread enthusiasm.