Retail investors keep buying the dip in stocks, but a retest of the June market low would spark selling, according to VandaTrack
- Retail investors are buying the dip in stocks despite Tuesday's inflation shocker, Vanda Research says.
- The research firm said retail investors purchased more than $2 billion of stock during Tuesday's rout.
- But any retest of the June stock market low could test the nerves of retail and lead to selling, Vanda said.
Retail investors continue to see opportunity in a falling stock market and are buying the decline, according to a Wednesday note from Vanda Research.
The research firm said retail investors plowed $2 billion into US-listed stocks on Tuesday after the August CPI report shocked investors and led to a sharp 4% decline in the S&P 500.
Much of the buying was concentrated in equity ETFs that track broader indices like the Nasdaq 100 and S&P 500, as well as in tech giants like Apple and Tesla, according to the note. Tuesday's buying by retail investors mostly occurred during the last 10 minutes of the trading day.
"However, this strong showing by mom-and-pop traders failed to support broad indices as selling pressure from professional investors was overwhelming," Vanda said. The firm estimated that there was more than $16 billion in equity outflows on Tuesday simply from the re-balancing activity of levered ETFs.
But while retail investors continued their trend of being contrarian and buying stocks on down days, there are signs of a longer-term deterioration in the buying appetite of everyday investors, according to Vanda.
"Overall, we continue to see a weakening trend in retail demand, and at the same time, multiple capitulation indicators are now flashing a warning sign. That means the likelihood of retail capitulation increases significantly near-term should equities re-test this year's June lows," Vanda said.
Part of the weakness from retail investors stems from seasonality, as investors typically lower their spending on financial securities during the holiday season. But big and persistent losses in investor portfolios could also be dinging sentiment and therefore stock buying activity, according to Vanda, which estimates that the average investor is down 27% year-to-date.
With the S&P 500 just 8% away from retesting its mid-June low, retail investors face a tough road ahead if stocks continue to weaken. "Retail investors rarely capitulate on the first significant drawdown," Vanda said, inferring that a second decline would likely cause many investors to throw in the towel and sell.
But capitulation from retail investors could actually signal a bottom has been made in the broader market, and retail investors' losses may be professional investors' gains.
"When capitulation day comes, we expect to see institutions meaningfully increase their broad equity and tech exposures with retail traders sitting on the other side of the trade. The perfect signal would see this exchange of assets happen during broad market weakness, ultimately opening a door for a more sustainable rebound," Vanda concluded.
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