Dip buying is so last April for retail investors
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Aggressive dip buying is fading for retail investors, according to J.P. Morgan, with new data indicating they're picking up ETFs instead of individual stocks.
Why it matters: Retail investors were good — or got lucky — in April, staying invested when the "smart" money pulled out and missed the start of a huge rally.
- The question is whether they're on target again this time.
By the numbers: Retail bought $5.2 billion worth of total equities last week, almost entirely through ETFs.
- ETFs soaked up $4.8 billion of that — 92% of retail flows.
Between the lines: Retail's participation in the meme stock craze gave the group a bad rap for being the "dumb money."
- During the highly volatile month of April, retail stayed invested while hedge funds boosted their shorts on the market, betting on further downside.
- Hedge funds are still trying to unwind those shorts as the market continues to break through record highs.
- This era has given retail investors a bit more credibility on Wall Street.
Zoom in: Within individual stock allocation, here's what mom and pop are buying and selling:
- Buying Nvidia, even after the company hit a record $4 trillion market cap
- Selling Tesla shares for the second straight week.
- Big buying for options on the "Magnificent 7" stocks, reaching the upper end of J.P. Morgan's historic range, though still below the peak in 2021.
Zoom out: Institutional investors sold $22 billion in cash equities last week, when the market notched additional record highs.
- For investors, retail or institutional, who got seasick during April's market downturn, the rally is an opportunity to reallocate and diversify portfolios ahead of what's expected to be a choppy second half of the year.
- According to BNP Paribas, hedge fund long positions are underperforming and shorts are crowded amid a momentum unwind, which could lead to more risk-off behavior from funds if they move to reduce exposure.
💭 Mady's thought bubble: Investing in individual companies takes strong investor hygiene, whereas investing in baskets of stocks through products like ETFs provides more diversification and, historically, less risk.
- The consistent flows into ETFs could indicate that the "dumb money" is following age-old investing advice: Time in the market matters more than timing the market.
- The fixed flows could also be indicative of retail practicing dollar-cost averaging, consistently buying into the market in regular intervals, which is the most highly recommended strategy for nonprofessional investors.
Be smart: Dips are getting increasingly short, partly thanks to the retail trade.
- If you have to buy the dip, the dips won't last long.
