What the E-Trade Indicator is Telling Us
Let’s be honest with ourselves for a bit. A marketing campaign that uses a cute little baby talking about how easy it is to trade stocks during the Super Bowl was never meant to target the professional investor.
With the takeaway that investing is so easy even a baby can do it, E-Trade (NASDAQGS:ETFC) was targeting the individual that either had never dipped their toe in investing before or the somewhat experienced individual that was simply looking to find a better online broker (NYSEARCA:IAI).
Such advertising is about as mainstream as they come, and in the investment world mainstream is just another word for “retail”.
The E-Trade Indicator
According to the Securities Industry Association there are over 50 million retail investors which are categorized as individual investors, retail brokers (that act on behalf of the retail investor), managed accounts, and investment clubs. Although the number of retail investors vastly outnumber professional investors and institutions, the dollars controlled by professionals are much more significant. This is one reason why retail is typically considered “the dumber money” as they control much less of the market than do professionals.
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Another reason for the label is that retail is thought to chase returns and follow trends (NYSEARCA:TRND) rather than create them.
Many of you have probably heard the saying “the retail investor is typically late to the party”, or “the retail investor buys the tops and sells the bottoms”. These are synonymous with returns chasing and trend following, likely a result of the retail investor not having as much or receiving valuable investment information typically later than the professionals.
Stats from E-Trade’s financials reveal another phenomenon supporting the notion that retail’s interest and trend following does occur in the stock market.
Utilizing E-Trade’s public data we can see how “interested” the retail investor is in the stock market and thus estimate what part of the market cycle we are in.
Simply, if there are more E-Traders, then there is more retail involved in the markets (NYSEARCA:VTI), and that may be a sign the market is close to a top, assuming we believe retail investors are indeed the “dumb money” that is chasing returns.
On the flipside, retailers stopped opening accounts during the 2009 crash, showing much less market interest than they did in years prior as account balances dropped drastically. This was likely an indicator a bottom was near as the retail investor stopped showing interest in the market (NYSEARCA:SNP:^GSPC), just at the time they should have been showing the most interest.
Following the number of accounts, number of trades, and retail assets E-Trade has can be used as a contrarian market indicator (NYSEARCA:VXX).
E-Traders Making a Record
Check out the following chart measuring E-Trade’s number of accounts since 2006 and total assets since 2003.
The number of retail accounts opened at E-Trade (shown in blue – left scale) just made another new all time high along with the number of assets in retail E-Trade accounts (shown in red – right scale).
Both measurements suggest the retail investor is very much back in the stock market as not only has the rising market brought assets at E-Trade well above 2007’s peak, but the number of people opening E-Trade accounts is now growing at 4.7%/year, well above their historical yearly average.
Compare today’s 3.1 million of retail accounts at E-Trade to 2007’s 2.4 million former peak and it isn’t hard to draw a conclusion that the retail investor is more engaged and interested in the stock market today than he or she was at the previous stock market peak in 2007.
For those that correctly believe the retail investor is notoriously late to the party, this is likely a meaningful piece of data.
The ETF Profit Strategy Newsletter uncovers the information others don’t. Last year over 70% of our Weekly Picks were profitable and this year our biggest winner was a 188% gain from our 6/5/14 alert. Right now the E-Trade indicator suggests retail investors are head over heels back in the stock market; a warning that the returns chasers may be driving the markets higher, not the smart money.