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Retail Investors Reverse Course


Ma and Pa pull their money out of the stock market.

It's hard to blame them: after that spooky "flash crash" and continued headline-making worries surrounding debt-choked Europe, investors decided to bail out of the stock market.

There had been some evidence building earlier this spring suggesting that retail investors might be slowly tiptoeing back in, as we detailed in our article Ma & Pa Investor Are Back, But Are They Too Late?

The love for stocks in their own backyard didn't appear to last long, however.

Specifically, during the past week through May 12, your friends and neighbors pulled $2.8 billion out of US stock funds, according to the latest data from the professional number crunchers at Lipper FMI.

To put that stat in context, we called up Robert Adler, the head of Lipper FMI Americas, for a chat this morning. He tells us that's the most investors have pulled out, in fact, since March 11, 2009.

At the same time, says Adler, investors plowed $16.6 billion into money-market funds. "That's the first inflows money market funds have seen in the last 16 weeks," he says.

Bond funds reported outflows of $636 million but the really interesting nugget, says Adler, was this: $1.4 billion came out of high yield bonds funds. That is the biggest outflow in about four years and the third biggest on record.

"There was an about-face this past week by investors," Adler says, noting that such outflows from both equity and bond funds, and a sharp reversal in money market funds, demonstrate a clear and dramatic shift in sentiment.

The analyst is quick to emphasize, however, that one week doesn't make a trend. "We have to wait another week to see whether this was simply event driven or if this is the beginning of a new trend," he says.

Of course, none of us can fault our friends for feeling antsy here. There was that nearly 1,000 intraday drop in the Dow on May 6, a freefall we detailed in our latest hard-hitting Pop Biz report, Did Computers Cause the May 6 Stock Market Crash?

Also, while investors initially cheered the nearly $1 trillion EU-IMF rescue package, they then paused -- took a deep breath -- and noodled on what the bailout's economic implications for the eurozone implied and, in turn, how that would impact our own fragile recovery on this side of the Atlantic.

Certainly, since the mother of all stabilization programs was announced, many of the reactions from financiers and politicians haven't been all that reassuring.

Deutsche Bank (DB) CEO Josef Ackermann said that Greece might not be able to repay its debt in full. Meanwhile, French President Nicolas Sarkozy reportedly warned of taking his country out of the eurozone if his brothers in Berlin didn't pony up and help rescue Greece.

Oh mon dieu!

Finally, in reaction to the idea that the ECB's reputation has taken a hit by deciding to buy government bonds, Jean-Claude Trichet fired back: "That is ridiculous," he said, adding, "Just who has been weak over the past few months? It was not the ECB. The governments with their high debts were weak." (Hat tip: Yardeni Research).

The major market indices seesawed last week, ending in the green. Today, as we report and scribble here in the early afternoon, the SPDR S&P 500 ETF (SPY), which includes holdings such as Exxon (XOM), Microsoft (MSFT), Apple (AAPL), General Electric (GE), and Procter & Gamble (PG), is down 1.03%.

For his take on the Lipper data, we also checked in with Vinny Catalano, president and global investment strategist with Blue Marble Research.

"This goes to the heart of the issue of confidence," Catalano says. "The flash crash caused market movements that investors don't understand. The alternative is to put your money someplace safe and the safest place is going to be a money market."

Catalano predicts that investors, with all their money, won't be coming back meaningfully into the equity market any time too soon. Frankly, he says, if you've booked profit then he thinks you've made the right call.

"The individual investor is astute to step out of the market and lighten up," Catalano says, noting that he's trimmed back his equity allocation to 54%.

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