Even as mom-and-pop investors sit out the rally, short-term players -- including some classic individual day traders -- appear to be making a comeback.
Trading volume surged 14% or more last month from July at online brokerage firms Charles Schwab Corp., TD Ameritrade Holding Corp. and E*Trade Financial Corp. Electronic trader Knight Capital Group Inc. also posted a 7.7% increase.
Total daily average revenue trades at E*Trade rose 37% from a year earlier in August.
It amounts to an unusually large jump in online trading, traditionally the domain of smaller investors. "Usually, August is one of the worst months of the year," said Richard Repetto of Sandler O'Neill Partners L.P., with volume typically falling 10% from July.
The trading surge coincided with a powerful rally in stock prices -- a wave these traders may have been trying to ride. The Dow Jones Industrial Average is up 14% from the start of July and 4% from the beginning of August. On Tuesday, the Dow closed at 9683.41, up 0.59%, its highest level since Oct. 6, 2008.
The revival of short-term trading doesn't necessarily reflect long-term confidence in stocks. That's because a lot of long-term money is still sitting on the sidelines.
For instance, mutual-fund investors -- who generally buy and hold for the longer term -- in August plowed 20 times as much money into cautious bond funds as they did into U.S. stocks, a riskier investment. And as of early this month, investors still had as much cash parked in money-market funds as they did a year ago, when the financial crisis was coming to a head.
At the same time, there's been heavy activity among "leveraged" exchange-traded funds, designed to magnify returns, and "inverse ETFs," designed to profit when prices fall, says Mr. Repetto of Sandler O'Neill. Both are favored tools among short-term traders such as hedge funds and day traders.
As evidence of the revival in short-term trading, much of the volume in recent weeks has been in financial stocks and other extremely volatile shares, where investors try to grab a quick buck on rapid price swings.
On many days in August, trading in Citigroup Inc., Bank of America Corp., Fannie Mae and Freddie Mac contributed more than 15% to 20% of total market volume, according to Credit Suisse. That's roughly double what it was at many points earlier this year. For the past month and a half, insurer American International Group Inc. frequently has ranked among the 10 most actively traded stocks.
Richard Matassa of Spring Hill, Fla., has been actively trading Citigroup and Bank of America since late last year. When their share prices collapsed, "there was some room to play them and buy them at high volumes," said the 40-year-old engineer.
He didn't stick around, though. Mr. Matassa said he got out Bank of America when it hit the low teens, and sold his Citigroup holdings in recent weeks.
Driving this trading are many professional short-term traders, some at hedge funds, others on the desks of Wall Street firms. In addition, there's a growing number of smaller, professional day-trading operations, some of which use borrowing, or "leverage," to boost returns. Leveraged players like these are helped by the fact that interest rates are very low, which makes the cost of borrowing money to finance their trading relatively cheap.
And while the recent stock-price volatility might spook long-term investors, it's attractive for traders who may not hold stocks for more than a few hours or even minutes at a time.
Long-term small investors, by contrast, "are still exhibiting a hunker-down mentality," says Sonya Morris, an analyst at fund research firm Morningstar Inc., "In spite of the broad recovery" in stocks this year. New data from Morningstar indicate that, during August, U.S. stock funds took in $1.9 billion -- but investors plowed nearly $40 billion into generally safer bond funds.
In another reflection of that cautious mood, investors continue to stash huge amounts of cash in the safety of money-market funds. As of Sept. 9, there was $3.5 trillion in money-market funds, according to the Investment Company Institute. While that's down from $3.9 trillion at the start of the year, it's still essentially flat from this time a year ago.
Thomas Sullivan of Jacksonville, Fla., believes the market is overpriced and has been doing more selling than buying. The retired book-publishing executive says he did most of his buying in the spring, when stocks were cheap. Since August and September, he says, he's been doing nothing but selling.
"The market is just too high," said Mr. Sullivan, 74, who now manages money for his own family and family's foundation and trusts.
Among 401(k)-plan participants, who generally have a long-term outlook when picking investments, there's been a dribble of money back into stocks from fixed-income investments in recent months, according to Hewitt Associates LLC. Still, stock holdings in 401(k) plans remain well below historical averages. Today, the average equity holdings in 401(k) plans is about 56%. That's the highest level since September 2008, but below the historical averages in the high 60s, according to Hewitt.
There has been a steady stream of buying by big, long-term institutional investors, Wall Street traders and analysts say. However, much of that buying has been characterized as getting portfolios back to a more neutral stance toward the market from heavily defensive positioning earlier in the year.
Jeff Kleintop, chief market strategist at LPL Financial in Boston, also notes there appears to have been money coming into the U.S. stock market from long-term overseas investors.
The hesitancy among individual long-term investors, Mr. Kleintop says, reflects the grim job market and financial situation for many Americans. Irrespective of what happens in the stock market, "the only economy that matters is your personal economy; it's how you feel about your own net worth," he says.
Bob Bilkie, a money manager in Southfield, Mich., has responded to requests from his high-net-worth clients to re-enter the market. Many are frustrated watching the rally pass them by, he says.
But even when buying stocks, he's looking at "defensive" names in health-care companies. "I wonder, am I putting my foot into a trap that I'm going to regret?"