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Are Retail Investors the Dumb Money Right Now?

There’s a lot of talk about the “smart” money on Wall Street — that is, how institutional investors such as hedge funds and money managers are trading right now. The theory is that if you know how the big guys are feeling,  you can get a sense for the sustainability of the rally.

And a recent post indicates that right now, the big guys are running for the exit while retail investors are holding the bag.

Check out this chart (h/t Lawrence McDonald) for proof:



Now, this doesn’t necessarily prove anything. The conspiracy theorists out there will say that the brisk buying by retail investors juxtaposed with the brisk selling among institutional investors is proof positive that this is a rally built on a house of cards and the hedgies are trying to cut and run before the collapse.

I’m not so sure. After all, the longer-term look shows that the “smart money” have been net sellers since January — and that means they’ve been fleeing a pretty impressive rally across the last few months.

Furthermore, while the numbers imply “net” sales, they don’t give specifics. For instance, are hedge funds dumping bonds and emerging markets? If so, that’s a smart move. And I would contend that retail investors are predisposed to U.S. equity, so they aren’t chasing these horrible asset classes.

So it’s not as simple as the Wall Street insiders cutting and running, leaving mom-and-pop investors holding the bag.

If only it were…

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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