Retail Saving the World

Retail investor opinions on the stock market have changed dramatically over the past 20 years.  In the early years of the bull market that started in 2009, most of the population didn't want anything to do with stocks.  Daytrading was dead.  Only the hardcore traders and investors were around.  Then as the market kept rising, they slowly crawled back into the market feeling FOMO starting around 2017.  And it went into overdrive after the Covid money spew and lockdowns gave retail investors the time and ammo to go wild in the stock market.  The rest is history.  

Its been a retail driven market since 2020.  They have only gained in importance as they continue to allocate more of their assets into stocks, and out of bonds and cash.  Retail investors will determine what happens to the stock market in the next 1-2 years.  Hedge funds are no longer the market movers.  The baton has been passed to retail.  

In the early part of the bull market in the 2010s, it was corporate stock buybacks that were providing the endless bid for the SPX.  That trend reached a peak in 2024, and has come down as more corporate cash flows go towards AI capex and less towards buybacks.  Ironically, the popping of the AI bubble and a drastic reduction in AI capex could result in a strong rebound in stock buybacks, which would soften the blow of the AI bubble popping.   

Over the past 12 months, private clients have been buying stocks, while institutions and hedge funds have been selling. 

But on November opex week, from November 17 to 21, retail investors broke from their trend of buying the dip and sold into the weakness.  Looking at how retail favorite stocks and bitcoin massively underperformed in November, it looks like retail investors are running low on dry powder to buy more stocks.  In a turn of the tables, it was hedge funds and institutions buying the dip, as retail sold into the hole.  

Foreign investors have been a big source of the retail buying demand for US stocks.  Looking at the below chart, foreign investors have had a knack for buying heavily before bear markets.  See 2000, 2007, and 2021.  They have bought huge over the past 12 months, buying into the US exceptionalism story.  Not a good sign for the future of this bull market.  

History doesn't repeat, but it rhymes.  2025 is rhyming with 2000.  With 2021.  Stock buybacks are decreasing, while stock prices are higher as hyperscalers reduce buybacks to spend on AI.  The corporate buyback bid is weaker than earlier in this bull market.  

The bull market is now dependent on continued retail investor flows into stocks even as they hold all-time high asset allocations in US equities.  Retail investor behavior this year is one of FOMO + saturation.  Those who want to buy into US stocks have mostly done so.  And they have gone in heavy, leaving them with little dry powder.  The Reddit crowd brags about having diamond hands.  But the big down move in bitcoin, along with recent ETF outflows show that's all talk.  As most traders know, the bigger your position, the weaker your hand. 

Retail investors are holding large asset allocations in equities/crypto with limited dry powder to buy more.  This provides a simple game plan in the coming months.  Short retail favorite stocks.  In the large cap space, here is a look at what retail investors have bought the most over the past 12 months:

 

As expected, NVDA and TSLA lead the pack in cumulative retail purchases over the past 12 months.  Those are 2 good stocks to short in 2026.  Of course, outside of the Mag7, there are plenty of other retail favorites out there that will have much more beta to the market.  Like PLTR, MSTR, BMNR, IONQ, RGTI, OKLO, etc.  Ape Wisdom is a good site which shows the trending stocks on Reddit.  It gives you a good idea of what retail is talking about.   

Sold some of the longs bought during November opex week but still holding about half, looking for more upside.  SPX is getting closer to where the buying should slow down.  But the strength has been surprising and greater than expected, which means it probably goes higher than expected.  SPX 6900 is possible sometime in December.  In hindsight, it looks like we got the panicky bottom after the sell the news reaction to the NVDA earnings beat.  So many traders have been taught that good news, bad price action is bearish. That kind of  thinking probably exacerbated the selling on Thursday and Friday, causing weak handed retail traders to throw in the towel.  

We have a big gap down as there is a Thanksgiving holiday hangover.  However, the strength off the November 21 bottom keeps me holding some longs looking for a bit more follow through buying.  It will get choppier as the fear has subsided quite a bit, so looking to sell remaining longs soon.  Also, the continuing relative weakness of bitcoin is a bit worrisome, although most of those negative effects should be behind us.  There are some positive catalysts remaining such as the Supreme Court decision on tariffs and Trump's pick for Fed chair.  So I'm reluctant to put on shorts before either of those news events come out.