Is Dow 12K Going to Pull in the Retail Investor?

Retail investors have pulled money from the stock market and fled into bonds, which some industry participants have blamed on the May 6th "Flash Crash." Now that the Dow Jones Industrial Average is approaching 11,000, which is a key psychological level, the question on CNBC today was whether Dow 12,000 is a watershed event that could boost investors' morale.

"I think its' going to take more than Dow 12,000 to change the individual investor's sentiment from already skeptical and bearish," said Art Nunes of IMS Capital Management. As evidence of his view, Nunes noted that the Dow has already been over 70 percent since the low on March 9th low and recent high. But Nunes said by any measures, investor sentiment was still as bearish as it was on March 9th. As evidence of retail investors' sentiment, Nunes pointed to mutual fund cash inflows, noting that we've had huge cash inflow into bond funds and outflows from stocks.

"It's going to take much more than Dow 12,000 to get investors turned around," said Nunes. Meanwhile, industry veteran Art Cashin of UBS Financial Services compared the situation to 1982 when then Federal Reserve Chairman Paul Volcker, worried about the Mexican situation, backed away from double-digit interest rates. The stock market rallied over 30 percent in two months before the Election Day and yet it didn't help. It took many more months for people to get chipper, Cashin recalled.

CNBC Anchor Mark Hanes suggested the Dow had to run up to 15,000 before it would make a different. If the market "went to 14,000 and change, "people would say, that's where it failed before, and they would not want to take a chance, he says. [The Dow vaulted to record 14,008 on Oct. 1, 2007.] "I think it really has to just runaway before people start stampeding back in on a retail level," said Hanes. Ten years ago the Nasdaq stock market hit an all-time high of 5,048 in March of 2000 just before the Internet tech bubble popped. Now it is only half of that high, noted the CNBC Anchor Erin Gray, calling the situation depressing. Nunes of IMS agreed that the Dow has to move much higher than 12000 before retail investors will return. "People have lost money in the stock portfolios. They're been under water in their real estate. They're out of their job or they're fearful of losing and the political environment is about as polarizing as you can get right now," said Nunes. Cashin concluded that retail investors are not jumping back in as of yet. "The mood of the investors is fool me once, shame on you, fool me twice, shame on me. So I agree. I think they're going to hang back and say they played this game before and they're a little nervous."

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio