COMPAQ's larger than average typical trade is featured in my boldface with the comment from Biryini that it does not have a strong following from individual investors. The whole article is about money flow.
April 5, 1999
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Mutual-Fund Inflows Slacken
As Individual Trading Grows
By GREG IP
Staff Reporter of THE WALL STREET JOURNAL
The stock market's fuel tank could be running low.
Investor cash flowing into stock mutual funds, while still big by historic standards, has slackened markedly in the past year. Investors have increasingly put their extra cash into money-market funds, or taken to trading individual stocks for themselves.
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The pullback reveals that there could be a more-tenuous commitment to the overall stock market by individuals than the record-setting performance of the Dow Jones Industrial Average indicates, some analysts say. Or the trend may reflect disenchantment with the stock-picking skills of mutual-fund managers, rather than stocks as an asset class.
In any case, the slackened fund "inflows," coupled with increased individual trading, may be feeding the divergence between a handful of soaring blue chips and the vast majority of stocks, which are languishing or even hitting 52-week lows.
"Since the correction of last summer, equity investors have been slowing down their purchases," says Eric Bjorgen, analyst at Leuthold/Weeden Research.
Mr. Bjorgen calculates that monthly inflows into U.S. stock funds in the 12 months through March averaged just 0.38% of total fund assets, half the rate of inflow of a year ago. The 12-month total net inflow dropped to $132 billion from $217 billion in that period.
What buying that there is has also been more sporadic, he says. There have been net redemptions in four weeks so far this year, compared with four in all of 1997 and 10 in all of 1998. That "tells me Main Street investors are becoming unsure of the equity markets and more reactionary to the market moves. They may be leaving their long-term investment approach in the dirt."
At first glance, the markets don't seem to be running out of fuel. The Dow Jones Industrial Average last week closed above 10000 for the first time. It later sold off to finish the holiday-shortened week up just 10.27 points, at 9832.51, but that is up 7.1% in the year so far. The Standard & Poor's 500-stock index is up 5.2%.
But those performances belie the misery of most stocks. The Value Line index, which represents the average performance of 1,700 large companies, is down 3.5%. The Dow industrials and S&P 500 are up thanks to the strength of the largest capitalization companies.
For the same reason, the average mutual-fund investor hasn't done nearly as well as the Dow industrials or S&P 500. General U.S. stock funds rose on average just 1% in the first quarter, compared with 4.8% for the average fund that replicates the S&P 500, according to Lipper Inc.
The decline in mutual-fund inflows doesn't correspond to an equivalent decline in individual-investor optimism, according to a survey by PaineWebber Inc. and Gallup Organization. Their March survey of 1,026 investors with at least $10,000 in investments found 77% think now is a good time to invest, compared with 72% last June. Their average expected return for the stock market in the next 12 months was virtually unchanged at 13.3%.
So if their opinion of the market is unchanged, why the slackened mutual-fund buying? It could be that many investors are choosing to trade stocks for themselves, especially over the Internet. This is reflected not just in the doubling of online trades to 339,500 per day in the fourth quarter last year from a year earlier, according to Credit Suisse First Boston, but in shrinking average trade sizes.
The average trade size on the Nasdaq Stock Market has fallen 38% since 1997, from 1,440 shares to 889 so far this year, according to ITG Inc., an electronic trade execution and research firm.
David Cushing, director of research at ITG, attributes the shrinkage both to increased activity by individual investors and "day traders" -- who jump in and out of stocks on an hourly basis, trying to make a quick profit -- and institutional investors chopping their trades into smaller pieces in response to more-fragmented markets. The average trade size of a New York Stock Exchange-listed stock has also decreased, though by less. It has fallen from 1,751 shares to 1,598.
It's a matter of some debate whether these individual traders are lifting the prices of stocks.
Laszlo Birinyi, a trading strategy consultant to Deutsche Bank Securities, says that many investors, unhappy with the results in mutual funds, have shifted to trading stocks themselves. "Individuals first buy stocks they know, and secondly they buy stocks that have done well, so stocks that have done well do better." Their activity might help explain why, for example, Microsoft and America Online together provided one-third of the S&P 500's 5.8% advance through Tuesday of last week.
Both are big, widely known issues and have been heading north almost nonstop since last fall.
"Anyone who has some familiarity with the Internet knows what AOL is," notes Mr. Birinyi. "They may not know what Lycos or some of those other things are." Indeed, the average trade size in AOL was just 834 shares in the past two weeks, according to ITG. That compares with 1,597 for Compaq Computer, also a Big Board technology stock but without the same following among individuals.
Rapid-fire individual traders control far less stock than big institutional investors and long-term individual stock holders. But Mr. Birinyi notes that the last price of a stock could be as easily set by the 100 shares purchased by an individual as the million shares bought by a big mutual fund or pension fund.
The stock market "is the only market in the world where retail sets wholesale prices," he says.
There is also an intense debate over whether mutual-fund buying statistics have any relevance at all to the market's direction. After all, there are also other big investors, like pension funds.
"Mutual funds are clearly important at the margin, but even so they're less than one-fourth of [total equity] assets," says Tom McManus, portfolio strategist at NationsBanc Montgomery Securities. "Performance drives fund flows. The net redemptions we're seeing in small-cap funds are a result of poor performance. They're not responsible for poor performance."
Indeed, the disparity between blue chips and smaller stocks, which many fund managers blame on their performance-chasing peers, corresponds to a disparity in fundamentals: Large company profits are growing, while small company profits are flat or falling.
But Mr. Bjorgen of Leuthold/Weeden counters: "The growth of the mutual-fund industry corresponds to this untethered rise in the market. To say inflows into equity funds haven't had an influence on that is ridiculous."
He agrees that fundamental factors establish trends. But mutual-fund investors "are trend followers and can keep the trend going." |
