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Investor Movement Index Proves Individuals Playing the Markets Are Not the 'Dumb Money'


TD Ameritrade's index indicates a decrease in buying during the S&P's April/May run-up and an increase during the June lows.

"I've been in this business for about 15 years, and one of the things that always drives me crazy is when the media and others refer to individual investors as the 'dumb money,'" says Nichole Sherrod, Trading Group Managing Director at TD Ameritrade (NYSE:AMTD).

Now Sherrod has a tool to help prove her point. Launched in January, the new Investor Movement Index, called the IMX, measures the trading sentiment of retail investors who use TD Ameritrade's brokerage services. The IMX was designed to be an additional analytical tool for investors, but also, as Sherrod told us, "to put forth empirical data that can show exactly what these investors are doing to really debunk the notion that they're the dumb money."

The index takes a monthly sample of TD Ameritrade clients and measures their holdings and positions in a process similar to beta weighting, which takes into account the percentage of each position in a portfolio to analyze risk and profit. So, for the IMX, each investor's portfolio is given a score; the median of all the individual scores is the IMX number for the month. There is no threshold for bearish or bullish sentiment, but the index is meant to be analyzed month-over-month, and against major indices, as a comparative tool.

The latest IMX score, for June, came in at 5.15, representing a 2.59% increase over May. As the S&P 500 (INDEXSP:.INX) index dropped 6% lower than its May high, the IMX jumped as Ameritrade clients returned to the market for a buying opportunity. This followed two consecutive months of decline in the IMX, while the S&P 500 steadily rose. "Through April and May, clients were dialing back their exposure because there was a lot of chatter about the anticipation of a pullback," says Sherrod. And a pullback there was.

For June, Tesla Motors (NASDAQ:TSLA) was one of the most-purchased stocks while the electric car company's stock continued its rally. Sherrod points out that investors had been building positions in Tesla since the beginning of the year, playing part in the stock's rally well before its big surge in May from $53.28 on May 1 to $110.33 on May 28.

Clients were also net buyers of government-sponsored mortgage companies Fannie Mae (OTCBB:FNMA) and Freddie Mac (OTCBB:FMCC) following a significant spike and decline in May for both companies. Additionally, Facebook (NASDAQ:FB) was a heavily bought stock as it traded down toward new lows for the year in June, signaling that clients feel the social network company holds more value than its current stock price suggests.

On the sell side, taxable and municipal bond ETFs and mutual funds were heavily sold through June. Tech stocks like Baidu (NASDAQ:BIDU), Microsoft (NASDAQ:MSFT), and Cisco (NASDAQ:CSCO) also saw more sales than purchases, which Sherrod explained simply as rotation.

As for the ambitions of the IMX, Sherrod told us:

Like ADP (NASDAQ:ADP) releases monthly private sector employment data, our vision for the index is to replicate that model, to show the Street, on a monthly basis, exactly what retail investors are doing. We get so many questions on a regular basis, like, "What's the individual investor thinking? Are they bullish or are they bearish? What's their sentiment?" Those are the kind of questions this is designed to answer.

The IMX is updated monthly and can be viewed here.

Follow me on Twitter: @JoshWolonick and @Minyanville

Disclosure: MVP, a division of Minyanville, Inc., has a business relationship with TD Ameritrade.
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