"Don't call it a comeback. I been here for years."
The retail trader is back. Retail is aggressively buying stocks and crypto in 2023. I am a bit skeptical about how they obtain data on retail investor flows, but everything I see points to them being generally correct. The outperformance of daytrader favorites such as TSLA, bitcoin, meme stocks, etc. so far in 2023 are trademarks of retail investor inflows.
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| Daily Net Inflows by Retail |
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| Bitcoin vs SPY 6 mo. chart |
Obviously retail investors are hooked on stocks. 2020 was the turning point for the stock market. That is the year when the stock market went from being a casino occupied mostly by institutions to being a casino now being filled with both institutions and retail investors. Individuals have found a new outlet for their gambling addiction: the stock market. Retail investors are the drivers of stocks like TSLA, even with its $600B+ market cap. They are the ones that move around bitcoin. This creates long term opportunities. Retail are the least informed investors and the best fades over the long term.
Fundamentals eventually determine the stock price. Dislocations in retail dominant names can only last as long as the retail investors keeping pumping money into the same stocks. Once they buy in, then the next step is not if, but when they sell. As we saw with tech stocks and retail favorites like TSLA in December 2022, when retail investors start losing lots of money, they panic just as much, if not more than institutions on the way out.
Retail investors have been buying into the soft landing/no landing thesis perpetuated by the institutions. Institutions have been coming back in and steadily increased net equity exposure this year, while retail has been piling back in and trying to relive their glory days in 2020 and 2021.
In a bear market, the investor positioning among institutions rarely gets much above average, as the fundamentals are just not strong enough to change enough minds to have the majority all bulled up. We are near a point where positioning will only get much more bullish if you see signs of earnings forecasts rebounding and inflation going down sharply to justify a pause and eventual rates cuts from the Fed. That's a high hurdle, considering all the forward looking economic indicators and the lagged effect of higher interest rates working to slow down credit growth and thus economic growth.
The options market is also showing signs of complacency, as the put/call ratios have been trending lower in 2023. The 20 day moving average of the CBOE equity put/call ratio is back towards mid August 2022 levels. That just happened to be when the SPX topped above 4300 and went down 800 points over the next 2 months.
If this is still a bear market, which I still believe, then you have limited upside from current levels, maybe a few percent at most in the SPX, and lots of downside. A skewed risk/reward ratio in favor of shorts. I was hesitant to go too heavy on the short side when I saw the lack of selling after bad inflation numbers and hot retail sales. I missed the juicy short above SPX 4140. Just too cautious and overthinking things as I was already short some high beta retail high flyers. Given how much CTAs and systematics have added to the stock buying over the past few weeks, there is not much more ammo left on the bull side.
The weakness in the bond market is the biggest barrier for a sustained stock market rally. The bond market could of course reverse and start rallying, but looking at the charts and the distance from prior lows, its not looking great for bonds either. The 10 year yield is at levels where the SPX was trading in the 3800s in late December. Either the bond market is too low or the stock market is too high, or a combination of the two. The divergence is getting extreme between stocks and bonds, and I wouldn't be surprised to see pension funds do a hefty rebalance out of stocks and into bonds going into the last few days of the month.
Big picture, it looks like a topping process is ongoing in the SPX/NDX and the bottom could fall out at anytime. There is serious rug pull risk here.
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8 comments:
some of my short positions were under pressure (five below in particular) - still seem crazily high. that tells me retail/manipulation is still heavy in the market so reducing my shorts at this opportunity
FIVE trades extremely strong compared to the market. Relentless uptrend. I would never touch a chart like that on the short side.
Yup. I got burnt with tsla for long. Then idxx Then snow but persisted till it paid for all my sins. Five will turn too i just need to manage sizing and slowdown when it is going so much against me. In the end, overvalued company selling junk to teenagers will be down 50-75pct.
The more market falls and five stays near the peak, higher also is the chance it crashes at some point
For individual stocks, I always want to know who is on the other side of the trade. With stocks like TSLA, CVNA, COIN, I know its uninformed retail traders just blindly following the herd regardless of fundamentals. Those are my preferred targets. With non retail dominated stocks, it gets trickier, especially when shorting stocks outperforming the market. Momentum in individual stocks tend to go on longer than shorts expect, especially if its institutions/large traders dominating the flow. I just dont have the patience to fight those battles, unless I know its greedy fish retail traders on the other side, which I gladly fade.
Thanks very useful. One more question for you. Five holders show that institutions hold 110pct of all float - does that mean that retail is short a ton? I have only looked at fundamentals all my investing career and never look at charts/holders and need to change that. But first step
Is to understand the basics
It means institutions are long more than the float, which means that they own the float + short interest. Basically almost no retail ownership in the stock.
hmm interesting it seems institutions are taking short retail guys like me for a ride. XOM has 65% institutional ownership. Need to figure how to use this.....thanks @marketowl
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