Rise of Retail Investors
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A major bank published research about the rise of retail investors. Retail (defined as any individual person who invests their own money) now make up 20% of trading volumes, rivaling institutions. Retail are no longer considered “dumb money” as they were in the past, thanks to widespread access to information and commercial trading platforms. Here are a few key findings from the report:
Retail are often more nimble than institutions in entering or exiting trends. They were heavily involved in the Gold/Silver bubble in Jan, and provided strong support for the rally.
Retail rose to prominence during Covid when people had time on their hands and stimulus checks to invest. Many thought this would be transitory, but instead it has become a structural force in markets.
Access to information and AI has been a game-changer for retail. It is easier than ever to form an opinion on a stock and act on it. Trading systems are accessible even on phones, at MUCH lower cost.
Social media can reveal where retail is moving next, as they are often vocal about trading intentions. They follow influencers for ideas. Highly mentioned stocks tend to perform well over a 20-day horizon (momentum effect). This has led to meme rallies seen in recent months.
In large cap stocks, retail sentiment is a mean reversion signal. Stocks with trending sentiment over 5 days tend to underperform. This highlights dislocations where investors are overexposed, leading to corrections.
It is therefore possible to exploit retail herding behavior to improve our edge.
Consider the recent Iran-driven selloff in stocks. Whereas institutions capitulated (sold) early in March, retail held up for several weeks longer and only capitulated at the end of March, coinciding with the exact bottom in SPX. This was the key reversal signal.
As you can see, this cohort is sizeable enough to move markets. That means they should not be ignored. Watch what retail is buying, but also when they are selling. It is useful for market timing purposes.
It is also our belief that this structural shift is eroding the “Value Investing” edge (a.k.a. Warren Buffett-style). Retail participants prefer narratives and momentum over fundamentals. That means price can remain decoupled from fundamentals for extended periods.
When positioning diverges too far from fundamentals, momentum will crash. This is why modern stock markets oscillate between two speeds: Feverish momentum chasing or sharp selloffs. Identifying these turning points is what makes market timing work.
So what is Retail thinking now? Read the full analysis at MktContext.com
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