Record Retail Trading Highs, Record Fund Manager Lows

Record Retail Trading Highs, Record Fund Manager Lows

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It feels good to see retail winning the fight, doesn’t it?

That’s been the 2023 story — so far at least. 2023 has been characterized thus far by a rapid ascent in the stock market — one that retail traders have been the main beneficiary of. January was a historic month for growth stocks in particular, with ARKK seeing its best January in history, and Tesla (a favorite among retail traders) nearly doubling over the past thirty days. 

On December 29th of 2022, with Tesla almost exactly at its bottom, Fortune published a piece titled, Tesla’s retail investors ignore bearish signals and pile into stock at record paceusing data published by Vanda Research. Now, in February, according to Forbes, Tesla was among the top sold stocks by retail in February. 

Retail traders who booked single-stock gains on Tesla have now achieved the dreams of most hedge funds, 80% of whom fail to even outperform the S&P 500.

Source: Google

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And about those winning retail Tesla traders — there are plenty of them. According to February 2023 research from JPMorgan, retail trading is at an all-time high — surpassing even the highs seen during 2021’s meme-frenzy. 

In the past, when retail traders have been more aggressive than institutional traders, it has been a bearish indicator — retail traders were easily shakeable, and often had misconceptions about the pace at which their trade would rise. But the analysts at JP Morgan aren’t so sure it’s going to be the same this time around. 

“The habits of day traders are shifting, according to Cheng’s analysis.”

While previous retail favorites, like BBBY and GME are up handsomely in 2023, retail traders have been largely shifting away from those names in favor of stable growers.

“Retail investors are accounting for an increasing percentage of total trading volume for large cap stocks, according to Cheng, and the most-bought stocks among non-institutional traders were Amazon and Apple.”

And while wealthy private investors have been reducing their frequency of options trades, at-home traders have been cashing in on the exceptional trading opportunities of early 2023.

“The top post from the last 24 hours on the WallStreetBets subreddit, whose more than 13 million subscribers drive much of the retail trading activity, reads: “​​META Yolo, up $75k so far, gunna keep holding.” The post includes a screenshot of 488 call option contracts for Meta stock at a 587% gain after the Facebook parent notched its largest single-day stock gain in a decade, showing at-home traders remain enamored with options.” 

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What does it mean for the markets?

Traders are hungry. Here are the ingredients that sit in front of us:

  • An S&P that has seen its best January in four years. Historically, January being a positive month has been an indicator of gains-to-come for the remainder of the year.
  • A technical breakout — during that January rally, the S&P 500 broke above its 65-day high (something it could not do during the entirety of 2022), and broke decisively above the 2022 downtrend line for the first time.
  • Massive hedge fund warchests sitting on the sidelines, which have largely underperformed the S&P 500 even during 2022, when the S&P was falling rapidly.
  • Retail traders who are actively participating in the market, shifting their trading habits, and accounting for a growing portion of large-cap stock ownership.

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To this writer, the elements above look like the perfect ingredients for a bullish 2023 — and perhaps more interestingly, a change in paradigm from the belief that one needs to rely on fund managers and institutions to manage their money. For the Rebels who understand that Wall Street was never designed to serve you or your interests — that’s great news. 

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