This index could make you a richer stock investor

NEW YORK (MarketWatch) � There�s a new investment index that you can�t trade, but it could help you make bigger profits or suffer smaller losses.

TD Ameritrade Holding Corp.�s AMTD �Investor Movement Index, or IMX, tracks the monthly changes in accounts at TD Ameritrade held by individual investors.

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That�s around six million accounts. Says Steve Quirk, senior vice president of trading at TD Ameritrade: �How those accounts change from month to month is insightful information.�

Indeed, investor-sentiment indicators typically are based on surveys. Quirk notes that �sometimes there can be a disconnect between what people say and what they do. This index tracks actual behavior.

�We have a large group of retail clients that are pretty savvy,� he adds. �They listen to the experts but they also want to know what others in their position are doing.�

The IMX �proprietary� methodology is not fully transparent because TD Ameritrade doesn�t want to give away the recipe to rivals such as E*Trade Financial Corp. ETFC � and Charles Schwab Corp. SCHW �. But the gist is on TD Ameritrade�s customer website.

Here are the highlights:

The index includes all individual investor accounts with balances of $2,000 or more that have made a trade within the preceding four weeks. Thus, the sample size varies with each calculation, depending on trading activity.

Each account, with all of its component asset classes, including cash, is scored according to several factors. Among them are the kind of trades (buying or selling) and the account�s overall risk profile. This latter factor is measured by whether holdings include options, high-volatility stocks and leveraged ETFs and whether the account trades on margin. The more risky the account is, the higher its score.

Another scoring factor is how recent the trades are. Trades four weeks ago have less weight than this week�s. Account balances play a role, too, which means market rallies or slumps affect scores.

Once all account scores are determined, the median of those scores becomes the official index number. Each account carries the same weight regardless of how much money is in it. The index is calculated weekly but published monthly. Again, recent scores have more influence than those a month old.

With the announcement of the IMX, TD Ameritrade revealed that the index stood at 4.94 for December. �The number itself doesn�t mean much,� Quirk says. �It�s the change in the number that�s important.�

The firm�s website cautions: �There are no defined bullish/bearish thresholds for the index. Scores should be viewed relative to other periods � the more scores you consider, the more likely you are to see trends that can be compared to other indices or market dynamics.�

The index in December rose 0.08 point, or 1.65%. That means TD Ameritrade�s client base acted somewhat more bullishly last month. The rise followed flat readings in October and November, the firm said in the commentary that accompanies each month�s index.

Based on history (some of which is back-tested) beginning in January 2010, the IMX is at the higher end of its three-year range. Its previous peaks were reached in April 2010 (5.40) and June 2011 (5.56). Its low point (3.50) was a year ago this month.

TD Ameritrade says the IMX �has generally correlated with the S&P 500 SPX �as clients react to equity price movements, but the index has gone through uncorrelated periods.�

For example, the S&P 500 began to recover from its 2011 summer slump in the fall of that year, �but the IMX continued to decrease until it reached a new low in January 2012. Once the S&P 500 seemed to have an established upward trend at the beginning of 2012 the IMX started to rise.�

The commentary also includes popular buy and sell trades in specific stocks. In December, the accounts were net buyers of Apple Inc. AAPL �, Microsoft Corp. MSFT �, Facebook Inc. FB � and Intel Corp. INTC �, while selling Cisco Systems Inc. (CSCO �, Google Inc. GOOG �, Bank of America Corp. BAC � and Ford Motor Co. F �.

Other breakdowns of the index data � for example, by active traders or Baby Boomer investors � aren�t available. �The IMX is meant to be viewed only at an aggregated level,� TD Ameritrade says, �to protect the privacy of any individual account.�

At this point there aren�t any plans to create a financial product based on IMX, Quirk says. While it seems like a worthwhile addition to the collection of sentiment indicators, we�ll have to watch it for a while to get comfortable with its movements.

On the plus side, the index measures actual investor behavior, which is infinitely better than what�s-up? polls. One negative is that the index is biased toward trading action rather than inaction; if you�re happy with your asset allocation and holdings, you don�t count.

Obviously, the index should not be used out of the context of other market information, much less followed blindly. An investor who did so would simply be a herd-follower. Of course, says Quirk, �If the herd is running away from a lion, maybe being part of it isn�t so bad.�

John Prestbo is retired as editor and executive director of Dow Jones Indexes, now part of S&P Dow Jones Indices, in which Dow Jones & Co., publisher of MarketWatch, holds a small interest.