Retail Investors Flooded Into Stocks On Monday Just As Professional Sentiment Turned Most Bearish Since Last October

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by Tyler Durden
Tuesday, Sep 21, 2021 - 12:38 PM

One week ago, when we last looked at the decline in retail participation in the market, we quoted Vanda Research which said that this trend raised the chances of more serious declines if big investors continue to retreat.

“While we have seen a pick-up in ETF buying this week, the magnitude has been a little underwhelming relative to previous selloffs,” Ben Onatibia and Giacomo Pierantoni wrote. “This diminishing appetite to support the equity rally raises the odds of a larger selloff if institutional investors continue to sell.”

In retrospect, they were right, even if instead of a full-blown 10% correction we just got a modest half "corr", which saw the S&P suffer its first 5% drawdown since 2020.

Picking up on this, this morning Susquehanna looking at the latest data from the Options Clearing Corp. and noted that so-called newbie traders - those buying or selling 10 contracts or less at a time - continued to scale back their equity call-option buying to nearly a 17-month low going into the rout...

... a move which according to Bloomberg looked rather smart with the S&P 500 down 1.7% on Monday and bearish bets on the market’s trajectory on the rise.

According to Susquehanna’s Christopher Jacobson, the so-called "dumb money" retail crowd had been scaling back its call-buying appetites along with professional investors, albeit for slightly different reasons. The latter is doing it out of fear that this year’s rally of as much as 21% is losing steam, while the former is chasing a rally in hotter assets like cryptocurrencies. Whatever the reason, the synchronized skepticism may lend optimism to the idea that the selloff’s blow to the market won’t be as severe as it could have been otherwise.

However, there was a sharp divergence between what professional investors and retail traders did on Monday when stocks tumbled amid growing fears of Evergrande contagion: on one hand, there was a bearish options deluge with ~5.3 million bearish contracts on the SPDR S&P 500 ETF Trust changing hands yesterday, the most since June last year, data compiled by Bloomberg show. That as the volume of call contacts reached the highest since 2013.

This was likely due to Wall Street professionals betting that Monday's slide was just getting started, a sentiment underscored by the latest AAII survey print, which showed that sentiment plumbed lows not seen since 2020 as the gap between bearish and bullish sentiment readings hit the widest level since October 2020... and touched the point that has been historically associated with buying opportunities. Indeed, according to RBC Capital Markets, when the gap was wider than minus-10 in the past, the S&P 500 rallied 86% of the time in the next 12 months, gaining 15% on average.

And while to some, like Miller Tabak’s Matt Maley, the soaring negative sentiment wasn't sufficient to sound an all-clear - after all we still haven't had a day when China was back from holiday and we have no idea how Beijing will respond to the Evergrande fireworks - noting that “we’re going to have to see that activity come down and meet the lower level of bullishness before it would signal a change,” retail investors had seen enough, and after treading water for the past few weeks into yesterday's dump, retail daytraders took advantage of the selloff to pile back into some of the largest U.S. exchange-traded funds and bank stocks, providing a buying boost to sliding stock and bucking worries that the group would let stocks tumble.

According to the latest Vanda research note, individual investors bought a total of $1.93 billion worth of assets Monday, the fourth-largest net buying since the start of the pandemic.

Vanda found that buying from the day-trading crowd was mostly concentrated in popular index ETFs such as the SPY, and the QQQ which saw combined inflows of $337 million, while separate data from Fidelity showed the SPY fund and Apple shares were the most bought assets on its platform Monday.

Large investment banks - such as Citigroup and Bank of America - were also among the most bought companies, while bigger institutional investors were likely selling, Vanda said.

The data suggest that just as professional investors were positioning for further downside by a surge in put buying, retail investors took the other side of the trade, and rushed into the broader markets, particularly in megacap tech stocks, to increase their holdings in spite of a jump in volatility.

There was a surprise in the Vanda data which found individuals sold shares of airline companies like American Airlines Group and Delta Air Lines; Vanda researcher Ben Onatibia wrote. That selling “means institutional investors were on the other side of the trade, building exposure to the reopening trade.”

True to form, daytraders also snapped up shares of meme stocks despite the group’s worst day in months. Favorites like AMC Entertainment and GameStop saw continued interest, but newcomers like SmileDirectClub were also bought, Fidelity data show. The three stocks were among the most traded companies on Monday and edged  higher on Tuesday.

Nicholas Colas, co-founder of DataTrek Research, said the return of retail traders buying the dip was an “important observation,” given their impact on stock markets in 2021, and a continuation of what we said in May 2020 when we explained "How Retail Investors Took Over The Stock Market."