Retail investors are the most bearish they've been in months after September's inflation shock, but a rebound in the S&P 500 would spark new buying spree, research firm says

• Bearishness among retail investors reached its highest since June after the last CPI report, Vanda Research says.
• Individual investors appear to be raising their allocation to money market funds and cash.

US retail investors slowed the pace of their stock purchases following another hot inflation report that inspired huge equity swings, but a sustainable bear-market rally could revive their appetite to buy, Vanda Research said Wednesday.

The firm in a weekly update said bearishness among individual investors was at its highest since June. Average daily net inflows of $938 million a day over the last five trading days have been sharply lower than the year-to-date average. Daily net inflows on average tend to top more than $1 billion.

It also pointed out that the ProShares UltraPro Short QQQ ETF has topped its VandaTrack leaderboard almost every day over the last few sessions. SQQQ - a three times leveraged exchange-traded fund that inversely tracks the Nasdaq 100 - hit a 52-week high last week at $69.55.

"Retail investors were reluctant to raise their risk exposure after a bearish CPI print," said Marco Iachini, senior vice president of research, at Vanda. The US government's core inflation reading for September released last week was 6.6%, higher than a Bloomberg consensus estimate of 6.5%.

Stocks initially plunged after last Thursday's report and Vanda said retail investors were buying the dip. But they turned net sellers during the wild session that saw the S&P 500 turn higher, marking an intraday swing of 5% to close up by more than 2%. Retail investors appeared hesitant to chase the rebound in stocks over the following days, the firm said.

"In our view, individual investors are slowly raising their allocation to money market funds and cash as they offer a relatively high yield - but we haven't seen a capitulation yet," he said.

Vanda noted that retail investors are contrarian in the short term and reduce net purchases buying at the early stages of a bear-market rebound, mainly if a bounce back doesn't stem from a notable macroenvironment change.

"Once the momentum stabilizes, they are likely to chase the performance and raise their purchases as it happened during the summer," said Iachini.

"As a result, we expect them to raise their net buying of speculative assets over the next two weeks if the S&P 500 continues to rally," he said.

The S&P 500 had climbed in the past two sessions but was moving lower during Wednesday's action.

Vanda was also looking for strong buying activity in Tesla and Apple with their quarterly financial results due. Tesla was set to report earnings after the closing bell on Wednesday and Apple's numbers are slated for release on October 27.