New research indicates that a growing division between institutional investors and their retail counterparts may be setting up the stock market for a collision.
Tuesday, July 15, 2014
A joint study of data compiled by Bloomberg and the Investment Company Institute shows that approximately $100 billion was poured into exchange-traded funds (ETFs) and equity-based mutual funds over the last 12 months, a ten-fold increase over the previous yearly period.
Meanwhile, the researchers found, professional investors and major banks have projected the end of a sturdy bull market, based on high valuations for publicly traded companies. This information is now reaching the ear of the non-institutional investor, and its impact could change the US market's course.
Blue skies or stormy weather?
Institutional investors tend to be wary of rallies largely backed by the Main Street investor. These retail buyers and sellers typically work with a lower level of access to data and less sophisticated analytics than their professional counterparts. Nick Skiming of the Channel Islands-based Ashburton Investments, told Bloomberg that "As institutional investors, we’re always concerned when the retail investor is actually arriving in the market. The retail investor arrives when they can only see blue skies."
Of course, this doesn't mean that the bull market has fully run its course. The arrival of these investors can push markets higher, creating a positive feedback loop and creating opportunities for some to capitalize on "irrational exuberance."
Defrosting the perma-bears
Of course, there are always those who believe that any news from the market signals the beginning of a vicious, unprecedented crash. In any given week, it's easy to find those stating that the bear market of the century begins tomorrow. Those who called out the 2007-2009 recession in advance achieved something like oracular status in the media.
MarketWatch's Chuck Jaffe cautions against recklessly surging into bear-market funds, particularly in a reactive fashion rather than as part of a carefully planned and executed strategy. Jaffe suggests that for most, the right way to use bearish funds is as insurance, if at all.
Binary options in the bull market
A surge of retail investors into the stock market tends to keep pushing up the headline figures of the S&P 500, Dow Jones Industrial Average and other indices on a daily basis. In these circumstances, binary options on a popular index can deliver a nice potential upside bonus to a portfolio. As long as the market rises above the strike price bought, the binary options pays out at full value.
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