The Wisdom of Crowds: Americans Refusing To Buy Into the Rally
  (March 19, 2010)

The U.S. stock market has been rallying for over a year, yet "retail" investors are selling, not buying. Is this "the wisdom of crowds" in action?

A funny thing happened on the way to the greatest stock market rally since the 1930s--the "retail" (individual) investor is selling stock mutual funds, not buying. As I noted yesterday, According to BusinessWeek/Bloomberg, U.S. investors dumped $369 billion into bond mutual funds since March of 2009, while according to Reuters, they extracted $26 billion from equity/stock funds.

In other words, the great unwashed public isn't buying into the "return of a new Bull Market" and "the recession is over, we have a V-shaped recovery" stories being relentlessly flogged by "tout TV," the MSM and inside-the-Beltway hacks and factotums.

Perhaps they are taking note of reality on the ground, and refusing to accept the pearls of wisdom being forced on them by their "betters"?

Analysts and other "experts" are confounded that the public is recalcitrantly refusing to buy into their usual "pump and dump" schemes. In the normal course of events, "experts" pump stocks as the greatest investment opportunity of a generation and that making money in the market is like stealing candy from a baby, etc.

Then, as the "retail" investor/speculator buys into the hype, the insiders sell (distribute) their shares, leaving the "retail" marks holding the bag as the insiders go short and profit from the collapse of stock valuations.

This worked extremely well for the "smart money" in 1998-2002 and again in 2003-2007.

Individuals are shunning stocks like the Devil himself (more than an analogy) while placing their money in "safe" bonds (safe until interest rates rise--see yesterday's entry) and money market funds, which are holding about $3 trillion in cash.

The "experts" and apparatchiks are drolling over that $3 trillion; they keep hoping the retail investors will finally break down and transfer those trillions into the stock market, and thence into the accounts of the "smart money."

Remarkably, individual investors seem to have learned the old lesson, of "once burned, twice shy" rather well. Having lost $11 trillion since the global financial meltdown began in earnest in late 2008, "the little guy" no longer believes the stock market is a fair and open market, nor that it is a "wise investment" to "buy and hold" as their "betters" keep insisting.

This raises the interesting possibility that the "crowd" has more insight and wisdom than the "experts" and shills. The notion that groups have a collective wisdom which exceeds that of "experts" was explored in two recent books: The Wisdom of Crowds and Crowdsourcing: Why the Power of the Crowd Is Driving the Future of Business .

"Crowdsourcing" is now a hot buzzword, but in essence any transparent market is form of crowdsourcing. But as we all know, the transparency of the stock market is only a useful illusion--useful to those pulling the strings behind the screen.

The crowd is no longer buying the "the stock market is a transparent, open market" propaganda, which is partly why they're pulling money out of equity mutual funds.

In other words, the crowd is speaking by staying away in droves.

There is abundant evidence that the "smart money" has melted the market higher by buying and selling to themselves in various forms of high-frequency trading and manipulation of the futures contracts. None of this raises an eyebrow on "the Street" or in Washington; the "smart money" players are benefitting, and the only fly in the ointment is the retail investors' annoying refusal to jump on board the "Bull market rally" so insiders can sell to them before pulling the plug.

It seems clear that the crowd of individual investors is telling the "smart money" that they can take this rally and shove it. The "experts" continue to cluck and tsk-tsk that the "dumb" individual who is sitting on cash instead of being fully invested in the wonderful stock market is foolishly mssing out on a rally which "has plenty of legs" and "is only moving higher as corporate profits recover" and all the other enticing siren-songs they have long mastered.

Maybe the "smart money" experts are right, and the market will only keep rising essentially forever, as it did from 1982 to 2007. But then maybe the "crowd" has sniffed a rat and is refusing to play the 3-card monte game offered by the "experts."

Interestingly, corporate insiders are selling at a furious pace. Doesn't that give the lie to the "smart money" assertions that corporate profits are set to skyrocket and the stock market is the one place you want to be if you want to rake in stupendouly easy gains?

We'll see who is wiser, the crowd or the "smart money."

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