A year ago, JPMorgan warned those who were willing to listen that institutions and hedge funds are using the rally to sell to retail investors. JPM’s punchline:
“This apparent unwillingness by institutional investors to raise their equity exposures YTD reinforces the argument that it is retail rather than institutional investors that most likely drove this year’s strong inflows into equity ETFs and as a result this year’s equity rally.”
There are several implications from these findings.
The first is that with ETFs the dominant vehicle of expressing market sentiment at this moment – almost exclusively by retail investors – it means that certain distinct market “aberrations” have become an odd fixture of the market, such as the daily market ramp (or collapse in the case of recent weeks) in the last 30 minutes of trading.
The other obvious finding is that the vast majority of professional, active investors and asset managers are taking advantage of the current market rally to sell risk and offload exposure to retail investors, who remain in the driver seat and provide ever higher prices against which to sell.
How long this unstable equilibrium persists is unclear, and JPM refuses to make any predictions.
However, with the fate of the market, now hitting record highs in the longest streak since 1987, it won’t take much to spook “mom and pop” daytraders and halt the ETF bid, resulting in the first market selloff under the Trump administration. We wonder what Trump, who has repeatedly pointed to the market’s outperformance as an indication of his successful policies, will say once the S&P prints its first correction (or bear market) under his watch.
Well those warnings and foresights seem extremely prescient now.
Mission Accomplished – Retail participation in the stock market has never been higher…
Furthermore, as Nomura’s Charlie McElligott noted this morning, for those hoping for a return to a normal “melt-up” market…
…the x-factor here is the damaged psyche of a market that sees its conditioned “buy the dip” muscle-memory getting burnt TWICE in a short period of time (ESPECIALLY late-comer retail investors)…
on top of the potential for further loss of momentum and maintenance of this new “volatility floor” which should keep deleveraging flows around over the coming weeks.
For now the retail investors’ last, best hope is corporate buybacks re-emergence as The Fed has made it clear this is “small potatoes” and any new plunge won’t be protected this time.