Guess who’s back, back again

American retail investors and traders are back after a brutal 2022, and seem to be embracing the Fed-pivot-soft-landing narrative. From JPMorgan overnight:

— Both the older and the younger cohorts of retail investors added risk YTD.

— The younger cohorts’ impulse into equities rose in recent weeks to the highest level since last August.

— The older cohorts have been buying both equity and bond funds at a strong pace YTD, reviving memories of the asset reflation flows of 2017.

— This abrupt change in behaviour at the beginning of 2023 is perhaps driven by increased confidence among retail investors that inflation has entered a downward trajectory and that the Fed policy rate is approaching its peak. Therefore, unless inflation reaccelerates inducing a significantly higher peak in the Fed funds rate than currently expected, it is likely that the YTD flow patterns by the older cohorts of retail investors will be sustained supporting both equities and bonds during 2023

JPMorgan’s Nikolaos Panigirtzoglou sorts retail investors into young and old cohorts. The olds primarily invest through mutual funds and ETFs. The youngs are more inclined to buy individual stocks, use margin and dabble with options.

Panigirtzoglou estimates that the olds have lumped $81bn into bond funds and $44bn into equity funds so far this year, after avoiding the former altogether in 2022 and yanking out a massive $340bn out of bond funds.

And what about the leverage-loving, risk-seeking younglings? Well, the peak of the options frenzy of 2021 is some way away, but purchases of retail-sized bundles of call options on individual stocks has rebounded strongly from the lows of last year, and are once again far above pre-2020 levels.

We do not have yet the monthly data from NYSE margin accounts for the month of January. However our higher frequency (i.e. weekly) proxy based on small traders’ equity call option flows, i.e. option customers with less than 10 contracts, show a sharp rebound YTD. These data come from OCC, the world’s largest equity derivatives clearing organization. They are weekly, with the week ending February 3rd as the last available observation. Figure 3 depicts these small traders’ call option flows for exchange-traded individual equity options in the US. This call option flow has increased markedly in recent weeks to its highest level since last August.

You can also see the return of retail traders in the rally of technology stocks and small-caps, plus a basket of stocks popular on big US retail trading platforms.

Proxies of the US retail impulse into tech-related individual stocks are sending a similar message of re-emergence of buying by the younger cohorts of retail investors. These younger cohorts of retail investors tended to favour large tech stocks as well as small caps and as a result their stock preference can be thought of as a barbell trade. From a performance perspective, this barbell trade can be proxied by the performance of Russell 2000 and Nasdaq indices vs. that of the S&P500. This relative performance proxy . . . rebounded in recent weeks pointing to re-risking by the younger cohorts. Equity baskets containing stocks popular with US retail trading platforms . . . are conveying a similar message.

Further reading:
— The undying options boom
— Meme-stock groups have raised $5bn in 2 years since trading frenzy
— Is a new era of retail trading emerging after GameStop saga?
— Rise of the retail army: the amateur traders transforming markets