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Smart Money vs. Dumb Money: Institutional Investors Capitalizing on Retail Investor Panic

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Two years into the aftermath of 2008's market crash, economic uncertainty persists, and many American investors remain afraid to invest in the stock market -- in the first seven months of this year, investors withdrew a whopping $33.12 billion from domestic stock market mutual funds, instead opting for "safe" investments like bonds.

According to Credit Suisse analyst Doug Cligott, "Small investors are losing their appetite for risk," even as the market rebounds. And given the rise of the individual investor over the past several decades, the contrast is all the more striking.

Following past recessions, individual investors have jumped at the chance to ride the wave of recovery. But this time around, with unemployment high, job growth stagnant, and a constant threat of market volatility, there's a general sense among small investors that stocks are no longer a "safe" and profitable bet.

Retail investors might be running for the hills, but our calculations show that institutional investors aren't spooked by current market conditions.

Based on the money flows of S&P 500 stocks, we found that institutional investors didn't add significantly to their stock positions, but they didn't sell, either. Our numbers show an average increase in institutional ownership of 0.05% for all S&P 500 stocks over the past three months.

Institutional investors, it seems, are being greedy while retail investors are being fearful. Maybe Wall Street is starting to see the public's nervousness as a buy signal?

Who's side do you want to be on?

Top institutional inflows over past three months
Here is a list of the stocks that saw the largest increase in institutional ownership over the past three months. For each stock, we'll list the percentage increase in ownership. Data sourced from

  • PPL Corp. (NYSE: PPL  ) : +42.81%
  • CF Industries Holdings (NYSE: CF  ) : +29.42%
  • Baker Hughes (NYSE: BHI  ) : +23.36%
  • American International Group (NYSE: AIG  ) : +21.86%
  • Polo Ralph Lauren (NYSE: RL  ) : +16.01%
  • Micron Technology (NYSE: MU  ) : +15.93%
  • Citigroup (NYSE: C  ) : +12.92%
  • SCANA (SCG): +11.91%
  • Stanley Black & Decker (NYSE: SWK  ) : +9.67%

Interactive Chart: Press "Play" to compare analyst ratings and annual performance of all the stocks mentioned above ...

Top institutional outflows over past three months
Here is a list of the stocks that saw the largest decrease in institutional ownership over the past three months. For each stock, we'll list the percentage decrease in ownership.

  • AK Steel Holding (NYSE: AKS  ) : -19.25%
  • Massey Energy (NYSE: MEE  ) : -14.48%
  • NASDAQ OMX Group (Nasdaq: NDAQ  ) : -13.67%
  • United States Steel (NYSE: X  ) : -12.70%
  • Office Depot (NYSE: ODP  ) : -11.30%
  • Ford Motor (NYSE: F  ) : -11.20%
  • AutoNation (NYSE: AN  ) : -10.81%
  • Sears Holdings (Nasdaq: SHLD  ) : -10.45%
  • AutoZone (NYSE: AZO  ) : -10.03%

Interactive Chart: Press "Play" to see compare the debt levels of all the companies mentioned above ...

For more from Kapitall, check out Warren Buffett's Trades: Visualizing the Oracle's Portfolio Tweaks.

At time of writing, Kapitall's Eben Esterhuizen and Alicia Sellitti did not own any of the securities mentioned above.

Nasdaq OMX Group is a Motley Fool Inside Value selection. Ford Motor is a Motley Fool Stock Advisor pick. Motley Fool Options has recommended writing covered calls on Nasdaq OMX Group. The Motley Fool has a disclosure policy.

Read/Post Comments (1) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 30, 2010, at 11:25 PM, BearishKW wrote:

    Good, well-timed article Eben.

    If you were in the market during the 2008 crash, you don't need to be reassured that the individual investor took a massive beating. It put a lot of people on the sidelines for good. I wish them well and nothing is going to change their minds.

    But if you're a savvy retail investor and still have a taste for equities, use insider buying and these institutional moves as an indicator. Much of this double-dip talk has very little to do with the markets themselves, and more to do with following the crowd, scrambling for ratings, and gaining notoriety (arm-chair and PHD economists, politicians, etc.). Every day you're bombarded with doom and gloom. Every week the same jobless claims number comes out and pushes the market down 1%. You can count on it.

    Take unemployment...sure 10% is bad. The only issue is that unemployment before the crash was already at 5%, and the 400,000+ unemployment claims that come out every week are the same people claiming it week after week.

    Now take dividend stocks. Currently, some of the greatest companies on the market trade at all-time low valuations, and pay out dividends of 3-7%. These companies are NOT reporting losses but gains...and beating and raising estimates. Bonds are only yielding 3% at best at the moment, and don't go up in value. Do you really see equities double dipping? Meaning these great companies, in great shape, at all time low values, will be paying 6%-14% yields or better?

    Follow the smart money, the money that has less of an emotional stake in the game, into good stocks that are reporting earnings...and diversify. If you wait for the first report of "good" jobless claims numbers, you may be too late to the party.

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