Chart 1: Retail investors continue to chase the stock market higher…
There is no perfect indicator in timing troughs or peaks in the stock market. However, some are more useful then others and today's sentiment indicator vs the S&P 500 does a decent job of telling us what the approximate portfolio of an individual retail investor might look like, so we can do the opposite at market inflection points.
The data is estimated via a survey conducted by AAII on a monthly basis. In early July, the survey concluded that an average individual investor might hold approximately 67% of their funds in the stock market, while holding 17% of their funds in cash. Equity exposure still remains at seven year highs, the peak of which was last seen in 2007.
On the other hand, low cash levels have always been a warning indicator of an intermediate market top and a possible correction. However, in recent years the Federal Reserve’s artificial monetary ZIRP policy has rendered this indicator useless.
Chart 2: …as they increase stock exposure and decrease their cash levels
