March 30, 8:45 AM EST: Robert Prechter has just posted a second Elliott Wave Theorist Interim Report this month, delivering another urgent message to subscribers. Interim Reports are rare: these two follow up on Prechter's 10-page March 18 Theorist. Get instant access to all three issues, risk-free. Details>>
Imagine an investor who stays out of the market through most of a two year rally -- only to jump back in just as prices reach a top.
Can it be that's what the "little guy" has done?
From March 2009 through Feb. 2011, the S&P 500 nearly doubled in value (before this recent downturn). After watching the market go up without them, it appears the emotions of the average investor changed from the "fear of loss" to the "hope of gain."
On the very day of the two year anniversary of the rally, an article appeared entitled, "Two Years After Market Low, the Little Guy is Back." Here's an excerpt:
"As a historic bull market reaches its second birthday...Little-guy investors appear to be on board. Since the beginning of the year, investors have put $24.2 billion into U.S. stock mutual funds, according to the Investment Company Institute. They withdrew $96.7 billion in 2010."
Associated Press, March 9
Since that article was published, the stock indexes have retreated.
The market has a way of pulling the ole' bait and switch routine. And you don't have to look at just recent market tops. It's one of the many ways markets have "tricked" investors (even very smart ones) for centuries:
"...the great genius Isaac Newton was finally baited into the famous South Sea Bubble near its peak, losing the equivalent of a million 1998 dollars. His resulting loss caused him to remark, 'I can measure the motions of bodies, but I cannot measure human folly.'"
The Wave Principle of Human Social Behavior, (p. 175)
Investor enthusiasm over South Sea Company shares was at a fever pitch when Newton finally decided to buy.
That's not the sort of history lesson we heard from the financial media and pundits in the first six weeks of this year. They could hardly contain their optimism for stocks. And as prices kept rising, mutual fund investors gave in to the rally. Many saw this as a bullish sign, but not EWI's Robert Prechter:
Many people cite this buying as the beginning of new money entering the stock market, but I think the capitulation of the only skeptical sector along with the media's bullish spin on the data are more likely signs of a top.
Elliott Wave Theorist, February 2011
And while stock mutual fund investors are buying, another group is selling. And they're selling at "the fastest pace in at least a decade."