Is The Retail Investor Rampage Over?

Since the crash in March 2020, the “retail investor army” marched propelled by chat rooms and social media channels. As discussed previously in “Blind Leading The Blind:”

Sources that Gen Z and millennial investors used for investing information in the past month

Of course, with fresh stimulus checks in hand, and sports betting shut down along with the economy, the stock market became the “casino of choice.”

However, something seems to be changing.

With sports betting back in action and stimulus checks running out, there seems to be a waning interest in the market. Recent google trend searches show some interesting trends.

For beginner investors with a fresh stimulus check in their hands, a search for learning how to trade or invest stocks faded along with the money.

Even the more speculative traders looking to leverage their returns seem to have lost interest.

That loss of interest also shows up in the areas where retail investors were most focused.

The Reddit website of the “Wall Street Bets” army has gone quiet in recent weeks as the stimulus support faded from the markets.

It all reminds me of what Yogi Berra once quipped:

When I was growing up, my brother and I regularly had “BB gun” wars. Of course, there was no such thing as safety equipment, helmets, or goggles. It was him, me, and a bunch of kids armed with brass BB’s and pump-action guns going after it. Of course, I can still hear my mother’s warnings:

Fortunately, we all survived. That in itself is quite a feat considering we rode in cars without seatbelts, drank from garden hoses, rode bikes without helmets, and regularly settled our differences behind the school. And, it all had to happen before the street lights came on.

Today, everyone is looking for someone else to blame. That is the story of Wall Street Bets.

Interestingly, it was Wall Street Bets which led to an exodus of users from the Robinhood trading app. Now the tables have turned as investors lost money, the excitement died, and having to go back to work for a paycheck crashed the party.

As Sam Stovall once quipped:

Such is currently the problem for the markets in the near term. Investors are exceedingly optimistic about future market returns as we noted last week:

With allocations to equities as a ratio to the disposable income at a record peak, such suggests there is little buying power left.

Such becomes more problematic as real disposable incomes return to more normal levels.

Of course, as liquidity dries up, the demand from retail investors which has made up nearly 20% of trading volumes this year also evaporates. The problem of “liquidity” becomes an important concern when markets are historically elevated from long-term means.

The chart below shows the deviation from the 3-year moving average, CAPE valuations, and RSI. These are levels never seen historically.

In other words, it’s all fun and games until someone gets their eye put out.

Some things don’t seem to change.

Currently, there seems to be no end to the rally. However, such is always the case just before it ends. In February of 2020 sentiment was much the same before a hair raising 35% plunge. Furthermore, those that chased the markets took on excess risk, and leveraged up to do it, will look for someone to blame for their losses.

Unfortunately, investors are faced with a terrible choice. Invest in extremely overvalued, extended, and bullish markets and hope they can navigate the eventual turn. Or, they can sit on the sidelines waiting for the eventual correction to take on equity risk.

In both cases, investors will wrong. The ones that pile in now will fail to navigate the turn as the “Fear Of Missing Out” keeps them allocated all the way down to the next bottom. Those that wait to get in will see the crash, and then stay out expecting stocks to continue to go lower. In the end, those that stayed in will eventually see their portfolio value recover, and those hoping to get in will still be on the sidelines.

Such is the psychology of investing, and eventually, individuals wind up looking for someone to blame.

Is the retail investing rampage over yet? Maybe. Maybe Not.

However, when the eventual unwinding occurs a new generation of investors will learn the brutal lessons of excess risk, speculation, leverage, and greed.

It is the oldest story on Wall Street.

Scroll to Top