Small-Time Traders Finally Souring on a Market They Once Ruled

(Bloomberg) - Retail investors, who piled into the post-pandemic market rally in record amounts, have started to lose their taste for stocks.

At TD Ameritrade, clients kept buying in April but sentiment soured to the lowest in two years as the S&P 500 delivered its worst month since March 2020. Morgan Stanley’s industry-wide data showed a decline in retail activity last month.

Monday’s rout sent more small-time investors to the market exits, as the group offloaded a net of about $1 billion in equities, the most aggressive selling in 14 months, according to data compiled by JPMorgan Chase & Co. strategist Peng Cheng.

The behavior of small-time investors is being watched on Wall Street for signs of cathartic selling that many say would be a signal the downdraft has reached its peak. Individuals haven’t given in so far, hanging on as equity indexes have racked up $9 trillion in losses this year. Monday’s retreat may be viewed as at least the beginning of a purge in animal spirits.

Futures on the S&P 500 rose 1% as of 8:15 a.m. in New York.

“One day in itself is not conclusive,” said Cheng in an interview. “If we see several days of heavy selling, then I would agree it’s a sign of capitulation.”

The bad days are starting to pile up, and the resolve of the retail army is being severely tested as gains from the pandemic rally dwindle. Small-time traders who jumped in when the lockdown began have now given back all of their profits since the start of 2020, according to an estimate by Morgan Stanley.

The monthslong slump is sapping the dip-buying spirit that ruled markets for two years. Professional money managers were already raising cash and cutting equity exposure as the Federal Reserve hiked interest rates to battle inflation.

“People think a significant amount of selling still needs to happen. And they would rather wait for it to happen instead of stepping in,” said Dennis DeBusschere, the founder of 22V Research. “Most are referring to the retail investor and still waiting for that shoe to drop.”

The Nasdaq 100 has been in a bear market decline of more than 20% for weeks, while the S&P 500 is down 16% so far in 2022. A basket of stocks favored by retail traders that Goldman Sachs Group Inc. tracks has fared worse, sinking 36% since January.

Tracking industry-wide data, Morgan Stanley found that small-time investors snapped up $14 billion in stocks last month, the second-slowest uptake in any month since late 2020. In the options market, where they used to rush to bullish calls for quick profits, activity is now tilting toward bearish puts.

Shawn Cruz, head trading strategist at TD Ameritrade, said clients recently scooped up large-cap tech stocks such as Inc. and Alphabet Inc. as their shares fell amid disappointing earnings.

“Demand for equities was generally light to start the month, but accelerated as the major indices continued their strong pullback below key support levels,” said Cruz. “Given the mounting concerns that have weighed on markets since the start of 2022, it shouldn’t be surprising that buyers were initially hard to come by.”

By Lu Wang


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