The Professional Side of the Market Analyzing Retail Crowd Activity

| September 1, 2013
Martha Stokes, CMT Martha Stokes, C.M.T. is the co-founder and CEO of TechniTrader®, an
educational firm dedicated to helping small investors and retail traders. Since 1998,

While the retail side calls the professional side “Wall Street” or “Smart Money,” the professional side often refers to the retail side in not-so-kind terms.  The professional side often refers to themselves as “Real Money.”   Their attitude stems from the fact that most retail traders are poorly educated, lack experience, and are very emotional. Recently there has been an increasing interest in studying what the retail side is doing.   The professional side has been doing its homework on how the retail investor and retail trader are investing and trading these days. Some professionals see this as a barometer of the stock market cycle and how far current price action can go. Other pros use it to gauge how to trade against the retail speculative, emotional reaction to news. This is because retail can keep the momentum of a particular stock or the stock market running long after the professionals know that it is severely overvalued.  When this occurs nowadays, the professional holds and sits back and lets the retail side take the stock or index far into the overvalued zones. On the other hand the professionals know that a huge contingent of retail side investors and traders also warn that the market is heading toward a major correction or Bear Market, and they will start to step out or lower their holdings accordingly. The professional side has become extremely proficient at not disturbing price action from the retail crowd, and they are making more money than ever from retail trading speculation. Meanwhile most retail investors and traders are struggling more than ever.

Despite the “looking down their noses” attitude, the professional side needs the retail side for many reasons. The volume that the retail side can provide is important to whatever market the retail trader chooses to invest or trade.  The retail crowd moves with crowd mentality and high emotional energy, and that can alter professional decisions about when to exit. During the 1990s more than half of the volume on the options markets was retail traders, and all professionals knew this.  While the retail crowd was using more and more complicated options strategies that created more and more losses, the professional side was using simple calls and puts and making a fortune.   But in recent years the void of retail traders trading options has been felt by the options professionals, who depended upon the volatility that retail options traders’ emotional buying and selling created to make higher profits.

Right now there is ongoing analysis using very simple methodology, to track where the retail side mindset is in terms of buying stocks, bonds, ETFs, etc. The professionals know that most of the retail options traders shifted their strategies in the first decade of this millennium. They could easily see the shift away from options trading in the volumes traded per day. The introduction of the retail broker-controlled Retail “FOREX Market” lured a huge segment of retail traders away from stocks and options.  Unfortunately, most of the retail crowd has had even lower success trading FOREX, which is not an option auction market but controlled by retail brokers.  Retail FOREX traders are not trading in a market but are trading against their own brokers.  This makes the retail FOREX much like a casino with the house (brokers) holding all the advantages. For now, professionals are using a very basic tool to locate the retail trader.  Google keyword searches help define where the retail trader or retail investor is in large numbers.  What they have discovered is that terms like “stock market, stock quote, stock tip, stock recommendations” peaked in 2008.

 

Currently the number of searches for such terms is less than half of what it was in 2007, and the volumes on the stock exchanges are about half of what they were. Searches using ETF showed that short ETF and Gold ETF are significantly higher than Bond ETF or Oil ETF. The analysis concludes that the average retail investor is still scared to death of stocks and the market. Recently the Bond Fund Market had a massive exodus of smaller funds to a tune of 80+ billion dollars in June followed in July by more rotation out of Bond Funds. When the bond market rebounded, the statistics of where that buying frenzy came from astounded the professionals of the Bond Market. The flow of money came from the Odd Lot Retail Investor.  This means the retail side of the market is an entire cycle behind the professionals, buying Bond Funds when the pros are dumping and moving heavily into stocks. The conclusion of the study by the professionals is that searches for stock prices are continuing in a secular decline. To the professional, this is great news. It means that the stock market cycle is not at the final peak of the cycle but merely at a resting phase.

Another study researched the most popular stocks that retail traders and investors were buying. They were AAPL, BAC, F, BRCM, TSLA, INTC, CALL, and NUGT which is an ETF.  Another discovery is that ETFs are still not a popular instrument for the retail crowd. With High Frequency Traders using strategies that deliberately seek out clusters of retail activity, this type of report is critical for the retail investor and trader.  It tells retail investor and trader where the retail crowd sentiment is at this time, and more importantly how the professional side is likely to react to that information.  Professionals tend to sell when the retail crowd rushes to buy into a stock.

Additional information available: I wrote a document titled the "Market Structure Report" in which I discuss the time I spent at the NY Stock Exchange talking with professionals of the market. If you would like more information regarding this Report send an email to info@technitrader.com.

Martha Stokes CMT and CEO of TechniTrader®

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