Retail Investors are Back

 The return of the retail investor is the biggest change I see in the stock market in 2020.  After getting burned after the dotcom bubble burst and after the horror show of 2008, they were mostly sidelined, but the masses have re-embraced the stock market.  It has taken 20 years to get back to these levels of call option speculation, especially in momentum stocks and daytrader favorites, such as TSLA, NIO, and a fairly new entrant, PLTR, which is the hottest stock among the retail investor crowd these days.  

 The excitement over concept stocks, with questionable long term business models are popular again.  On Wednesday, as PLTR was going parabolic, it had the highest option volume of all stocks, more than TSLA, more than AAPL.  And it was mostly in calls, as these millenial investors usually only bet on stocks going up.  

There are opportunities that arise when these bettors pile into call options after a parabolic up move.  The options prices become over-inflated and the options market makers starting jacking up the premiums to make it all but impossible for these retail punters to make money buying calls.  It happened in late August, and it is happening now. 

The basic strategy in these mania markets is to wait for the retail traders to push up the prices of their favored names to extreme overbought levels, and take the other side of the trade, usually in the morning when they usually enter their trades.  That is why you see frequent big gap ups in the daytrader favorites, as they are short term players and usually buy in the morning and sell later in the day.  

A similar phenomenon happened back in the dotcom bubble, when the internet stocks made most of their gains from big gap ups, as retail traders were excited to buy in the mornings.  Playing these momentum stocks is probably safest by buying near the close and selling at the open, capturing the gap up move that usually happens in these names.  It was one of my core strategies back in the bubble days, when internet stocks would make crazy moves.  

In these kind of markets, the easier fish to catch are in the stock market, and the stock indexes trade more randomly, since there is very little fear or emotional selling in the broader indices.  Over the past week, I have been focused on individual stocks and trading what is being moved by retail.  Its much easier to beat retail traders with short time frames and rather predictable tendencies than institutional investors who have longer time frames.  

Last week did seem to finally bring that euphoric mindset on Wall St, which probably means that we'll be chopping around for the next several days, and probably have a little pullback.  But I don't expect any big down moves here, there are just too many bulls out there waiting to pounce on any weakness to buy.