TD Ameritrade's Investor Movement Index Highlights Grim Grinning Outlook For 2019

Few investors would argue 2018 was a good year for their portfolios. No one would argue that it was better than 2017. A historical look at TD Ameritrade’s Investor Movement Index (IMX) paints a fairly stark portrait of just how much worse last year was than its predecessor.

Turns out, that gut check is more true than many might realize. The December 2018 release of the IMX, which tracks buying and selling behavior among the broker’s 11 million retail clients, posted its lowest score in more than two years at 4.41. That score is also within a tenth of its all-time low of 4.33, which it hit in March 2016.

Compare that to the December 2017’s IMX report, which marked the index’s all-time high of 8.59.

While there’s plenty of reasons underlying the difference in performance between the two years, the sheer rate of the drop each December bookends is worth closer scrutiny.

First, A Recap

Even a cursory glance at the historical IMX chart reveals the tide shifted quickly entering the new year. Following the December 2017 peak, there was a massive drawdown of nearly 10 percent in January as market leaders like Apple Inc. AAPL and Facebook, Inc. FB started to flounder, both ending the month in the red.

Then the February correction hit, which drove both the broad market down 10.2 percent and sent the IMX down more than 23.5 percent.

As volatility lingered, so did the investor pessimism. The IMX gradually shaved off points in both March and April, hitting a low of 4.79. April’s low reading was the first time the index had fallen below 5 since 2016.

Then, like the market, the IMX spent the summer steadily building back the gains it had lost in Q1. By late August, the S&P 500 managed to retake new highs while, in September, the IMX managed to top its February level.

Which brings the story to Q4 2018.

Driven by a conglomeration of interest rate fears, anxiety over trade and evidence of slowing long-term growth from Nasdaq tech leaders like Amazon.com, Inc. AMZN and the aforementioned Apple, the market’s volatile October, November and December ended up wiping out the entire year’s gains. The fallout didn’t manifest on the survey until November and December, which saw two consecutive 0.8 point drops, something that seemed rare back when it happened in January.

2018 Post-Mortem

One of the most telling aspects when comparing 2018’s investor activity to that of 2017 is the number of dramatic rises and falls between IMX data points. While 2017 only saw one 10-percent jump between October and November, the 2018 IMX fell by at least 10 percent four times, in February and March and again in November and December.

These movements generally align, and even occasionally preceded, sympathetic trends in the broad market, with late 2017’s 15 percent IMX spike seemingly anticipating the December/January market rally.

However, a more compelling correlation appears when Comparing the IMX to CBOE’s Volatility index (VIX). Taken this way, the 15-percent gain the index saw in late 2017 and subsequent +10 percent movements in the index anticipated the drastic swings in the market in the following weeks and months.

While the investor optimism that manifested as a 15-percent spike in the IMX’s reading could be seen as a indicator of the market’s subsequent rally in December and January, it may be more accurately seen as forecasting the return of volatility as 2018 rolled on.

What It Means For 2019

The increased frequency of 10-percent shifts in a sentiment indicator like the IMX might be the most valuable piece of information investors look at when considering what the months ahead hold.

The sharply negative November and December 2018 IMX readings might reveal a period of good equity performance, something already starting to manifest in the heart of January.

The continued shifts in investor sentiment, however, might more accurately forecast continued volatility into the near future. Given the dramatic gaps between the months, there’s still a good chance volatility might creep back in again until investor activity becomes more stable month-to-month.

Interpreting the signals in the IMX is up to each investor, but the whims of the market will have the ultimate say.