How The Retail Investor Was Lost Forever

My Buddy Chicago Sean had a great post  last week discussing how “The Next Flush Might be a Generational Bottom“. To sum up his post, he made the argument that because there is so much negativity surrounding the stock market, the next “Big One” was going to be the final sell-off that would mark a generational bottom.

The next Flush/Big-One was going to offer the opportunity of a lifetime as it clears out all the ‘retail investors’ out of the market. How does opportunity arise? It’s when something is mispriced. This might sound chauvinistic, but America is truly one of the greatest countries in the history of the planet. If US Stock sell-off significantly, or to a point where it’s only Hedge Funds and HFT pushing stock prices around, then opportunity will be presented.

So, how was the retail investor lost forever? Well, first off, lets take a look at the stats. How many people actually own stocks or have exposure to the stock market? I had a blog post a few months back talking about how “The Majority of America Does Not Care About Stocks“. In there, I talk about how 51% of Americans do not own any stocks at all. If you throw in those that have a small percentage of their net worth in stocks, than almost 70% (or more than 2/3rds) of America is effected very little by the movement in the stock market. And these stats are from 2007! I have to imagine that this number has only gone up.

So, what events has caused the retail investor to be lost forever (thus creating a possible generational bottom)?

The Events

1) The 2008 Crash 

As the housing bubble popped and major institutions failed from late 2007 to early 2009, the market crashed 58% (from the all-time high set in 2007 to the multi-year low set in 2009). With that much of a downtrun in the market, it likely wiped out a lot of  investors from the market

















2) The 2010 Flash Crash

As if the 2008/2009 market crash was not enough, on May 5, 2010, the market experienced probably one of the worst intraday declines ever, and it (mostly) happened in a matter of minutes. The market basically lost liquidity, and stocks “flash crashed” to ridiculous levels, some as low as 1 cent!
















3) The 2011 Debt Ceiling Standoff/Downgrade

Alright, so you survived both the 2008 market crash & 2010 Flash crash. Surely you’ve witnessed the steepest declines and its all clear-sailing from here right? Wrong! Last summer we witnessed the debt ceiling standoff (or should I say political fiasco) which resulted in the downgrade of the US debt rating by S&P (which ironically led to bond yields following to all-time lows).These two events led to insane market volatility, which crushed US Consumer confidence.

















4) 2011-2012 European Fears/Woes

Even though the market climbed after the 2011 sell-off, and even made new post-financial crisis highs in 2012, the European fears has put a hamper on confidence in the market. Most of Europe is in a recession, and some (like Greece and Spain) are in a depression. With the largest trading partner (The European Union) having such major problems, its hard to ignore that and put your money to work, especially after what has happened before.

Below is the ETF for Spain. As you see, we are trading below the 2009 low. That my friends is symptoms of a depression.



5) Facebook IPO, or should I say, “Failbook”?

After everything the markets been through, Facebook was going to swoop in and save the day. It was supposed to bring the retail investor back into the market (after all, nearly 1/8th of the world is on Facebook). Well, after a week of being public, all Facebook has done is Faceplant (Har,Har…). The stock is down 18% from the IPO price and is down about 25% from its opening price.


Final Thoughts

After all these events, any ‘retail investor’ left in the market will likely be wiped out by the next “Big One” (whatever it might be). Most people are already pulling their money out of stocks and into safer instruments such as bonds (despite the paltry yields). The next ‘flush’ will cause a great opportunity for those who still stand.

(This is purely Macro speculation but the next sell-off could happen in 2013 if we don’t avoid the fiscal cliff-Thus a lot hinges on the 2012 election to see if we can get some political unity in place. Even with a massive QE program, the $FED will be powerless to stop the recession caused by the pre-mature, politically-caused fiscal contraction.)


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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