Individual Investors May Be Coming Back to Stocks, Bespoke Says

Individual investors may be moving back into stocks, as gains in the Standard & Poor’s 500 Index this month occur at the start of the trading day, the time when they enter most transactions, Bespoke Investment Group LLC said.

The S&P 500’s average hourly change between the prior close and 10 a.m. is 0.45 percent, higher than the 0.18 percent that occurs in the next 60 minutes until 11 a.m., according to a Sept. 17 report sent to clients by Bespoke. The difference during the remaining one-hour segments of a session is less than 0.1 percent. The benchmark index for American equities has risen more than 8 percent this month.

The increase in the hourly percent change is a reversal from the last two weeks of August, when most of the declines happened in the first half hour of trading, Bespoke said. The S&P 500 averaged a drop of 0.43 percent each day through 10 a.m. during that period, while no subsequent hour had a mean decline of more than 0.1 percent. It fell 6.5 percent during that time.

“The individual investor either can’t make up his/her mind, or simply doesn’t even want to,” according to the report from Bespoke, which was founded by Paul Hickey and Justin Walters. Investors are “looking out of the side window and reacting to the financial news of the day (or hour, for that matter).”

The declines in the early part of the sessions in August created a bullish signal in the “Smart Money Indicator,” the report said. The SMI says retail investors, or individuals, trade near the start of sessions, while institutional investment actions are carried out mainly near the close.

Lack of Conviction

“Lack of conviction in the marketplace can certainly cause the long-term investor to become frustrated with the market’s ups and downs,” Bespoke said, “but it can also lead to temporary dislocations in the market that create enormous opportunities.”

Almost $57 billion was withdrawn from U.S. stock mutual funds from May through August, the most during any four-month period since 2008, according to data compiled by the Investment Company Institute. At the same time, more than $590 billion was stashed in bond funds.

Indicators such as cash flow and dividend yields suggest equities are cheap, and S&P 500 companies are forecast to post the fastest profit growth since 1988. That has been ignored in the past few months by investors burned by the 2008 financial crisis, who got another reason to be wary on May 6, when $862 billion was erased from share prices in 20 minutes.

Sustained job growth, consistent improvement in the housing market or stabilization in the European Union economies may lure money back to stocks, said Alan Gayle, senior investment strategist at RidgeWorth Capital Management in Richmond, Virginia, which oversees $63 billion.

“For a lot of retail investors, investing in equities has been like slogging through the rain the past 10 years,” he said. “They need a sign. They want something they can see, they can touch, they can feel. The question is what the catalyst is, what is it that’s going to generate that sustained growth?”

To contact the reporter on this story: Joanna Ossinger in New York at jossinger@bloomberg.net.

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net.

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