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Thursday, 9 April 2009

Why retail investors are starving themselves to death

Why retail investors are starving themselves to death
Clif Droke

Since the market bottomed and the new cyclical recovery bull market began, retail investors have gone on a collective buyer’s strike. Call it a “hunger strike” if you will. The retail crowd is effectively starving itself by missing out on some remarkable recoveries in recent weeks and will most likely continue to miss out on these opportunity until they simply can’t take it anymore. In other words, a classic repetition of the idealized market cycle is setting up perfectly.

So why exactly are retail investors starving themselves to death by refusing to participate in this most profitable of turnarounds? Answer: Because of the most powerful of all human emotions, namely fear. The lingering fear and pessimism from last year’s abnormal market plunge put most investors in a state of catalepsy that persists even now. They are too frightened to take their capital out of zero-yielding “safe haven” investments and put that capital back to work where it is being most rewarded right now, namely equities. When will these retail traders finally work up the nerve to re-enter the market? Answer: At the top.

With the passage of each week the market is giving us more and more signs that a real recovery is afoot, not just for equity market for prices but for key industries and economic segments as well. For instance, several weeks ago I mentioned in this commentary that a leading indicator of industrial commodities demand, the copper price along with the price action of Freeport Copper & Gold (FCX), were pointing to increased demand from overseas. This in turn harbingers a recovery in the global economy, which bodes well for the U.S. economic recovery. Freeport’s stock price broke out of that 4-month lateral consolidation base as anticipated and has rallied nearly $15/share since the beginning of March.

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