A little less than a month ago we reported that in addition to institutional investors, many of whom we knew had already thrown in the towel with hedge fund gross and net exposure the lowest in years, retail investors had also capitulated as their BTFD euphoria, observed so often during the stimmy days of 2021, was nowhere to be found.
Well, not anymore. With TSLA stock soaring 50% from its recent May lows prompting many to wonder if this is another manipulated gamma squeeze by the “usual suspects”…
… this morning Vanda Research writes that retail investor flows have been the major driver of the rebound in equities in the last few days across the broader market, as aggregate buying has been consistently above the YTD average (avg. $1.36BN over the last five days), while the focus has been on classic tech stocks such as TSLA, NVDA, AAPL, AMD, and AMZN.
As we discussed recently, the relatively strong earnings season and positive performance of the equity market have drawn attention to single names rather than generic equity ETFs. Vanda suspects that retail investors will continue to buy mainly single stocks and Tech over the next days or weeks – as long as the rally consolidates. However, according to Vanda, the pick-up in risk sentiment is likely to be fragile given the YTD large portfolio losses, and they caution that retail could (re)capitulate if the S&P 500 re-tests the lows which it will likely have to once Powell doubles down on hiking until he crushes inflation.
For now however, retail is back with a bang, and one doesn’t have to look at the insane surge in meme stocks like HKD that briefly pushed the $25mm revenue company to a market cap of $400 billion yesterday. As Vanda shows, last Friday net retail inflows were massive relative to the equity performance especially given that retail investors are contrarian: they buy when prices fall – as they perceive it as a good buy-the-dip opportunity. On the other side, they are hesitant to chase rallies in the early stages. Nevertheless, on the 29th of July, the net daily imbalance amounted to US$ 1.6Bn, the highest figure in a day of positive S&P 500 performance since the start of the sell-off.
What does this mean for markets? Well, as Vanda elaborates, strong retail participation is not necessarily good news, as the strong inflows are coming from momentum retail traders rather than institutional investors. The former are likely to try to recover their YTD losses by increasing their risk exposure aggressively (currently, their portfolio drawdown is at -23%). On the other side, as we have been nothing frequently, hedge funds and discretionary professional investors have been sidelined and are not willing to buy or sell actively.
The issue arises from the lack of retail investors’ psychological buffer (and lack of infinite bank account) to cope with further losses. Moreover, their conviction is likely to be based on the trend rather than a positive macro outlook. As a consequence, they will capitulate quickly if equities drop again.
Of course, as long as the broader momentum is higher – and it is for now thanks to short squeezes, blindly buying CTAs, and stock buybacks – retail buying continues, in the process infuriating those who have dubbed this the most hated rally. Indeed, with more than 60% of S&P 500 firms having reported Q2 earnings, retail investors continue to stick with their usual pattern of buying both on dips and on misses in single stocks during earnings season. Moreover, sector-level data shows that retail’s focus has shifted towards typical growth areas … particularly on EPS beats.
Interestingly, while high-beta growth sectors have attracted the most outsized inflows on EPS beats, Tech stocks as a whole have witnessed some outflows on misses so far. This pattern is corroborated by the number of tech companies sold vs. bought. Vanda suspects that retail investors are concentrating all their tech investments on just the usual handful of tech names (FAANGMT), which leaves less capital for disappointing tech stocks.
And while the FAAMG, or GAMMA as it is now known, sector has been the focus of retail buying, one specific company has been a supermagent for the renewed retail frenzy: according to Vanda, retail purchases of TSLA are skyrocketing as “retail investors have never been so bullish since summer ‘20.” It speculates that the strong buying activity followed the 3-for-1 stock split proposal, and while a stock split shouldn’t have an impact on the stock price, retail investors don’t care about fundamentals and instead speculate on the fact that historically stocks rallied after the split announcement as even a flood of even greater fools emerges to buy the stock. If the split will be confirmed, we could even see an acceleration of inflows – which could push the stock price higher.
More importantly, perhaps the recent surge in TSLA stock will cheer Elon Musk enough for him to drop his legal challenge to get out of the Twitter deal and accelerate his purchase of the social media company.
Of course, it’s not just TSLA that experienced a surge in interest from the retail army: the previously discussed likes of HKD, AMTD, and SIGA have been the most recent culprits, gaining significant traction in recent days. Should this market rebound have more legs, Vanda expects retail investors’ appetite for speculative stocks will grow, as they seek the opportunity to further scratch back the losses they’ve accumulated through the year. However, any risk-off moves could easily shift the focus again to broad ETFs (or trigger a capitulation).
Finally, while retail has traditionally stayed far away from the energy sector, thanks to the Buffet effect, this is changing and Occidental Petroleum has become a popular retail stock. Ever since regulatory filings disclosed Buffet’s US$ 5bn stake in OXY earlier in March with subsequent modest additions, the stock has witnessed a massive 16.5x increase in average daily net flows from retail investors (from $500k/day to $8.25mn/day). During the same window, the stock has rallied ~16% – outperforming both the S&P500 (-5.5%) and the energy sector (+2.6%)
There is more in the full Vanda Research retail tracker note available to pro subscribers