Retail Traders Have Been Driving The Market

By: Spencer Israel

At the end of February, we noted how the stock market’s sudden volatility had created an influx of trading activity from retail traders, underscoring the importance of reliable technology from retail brokerages. 

As it turns out, that was just the beginning. 

If the 30% correction from February 19-March 20 was the “fire in a crowded theatre” warning that sent investors running for the exits, then the nearly 35% rally from March 20-June 11 was the equivalent of Walmart on Black Friday. 

One need only look at the coverage this has gotten from the mainstream financial media in the past few days. Bloomberg noted the sudden influx of options buying. CNBC noted the rally in beaten-up stocks, as did Yahoo Finance. Even institutional investors have taken notice, with Goldman Sachs noting an increase in U.S. household savings as a probable cause of new traders and investors joining the rally. 

For nearly three whole months, traders—many of them novices taking advantage of the historical volatility and lack of trading commissions—flooded into some of the hardest-hit areas of the market. Airline stocks. Cruise stocks. Retail stocks. Even bankrupt companies. If a stock was in financial trouble or considered near “ground zero” of this crisis, chances are it caught a rally in May and June. 

No companies embody this trend quite like the bankrupt ones. Though they’ve since come off their recent highs, a number of companies declaring bankruptcy—including Whiting Petroleum, Hertz, JC Penney, and Chesapeake Energy—all saw significant rallies in the first week of June. Hertz’s rally was so significant that the company is now attempting to use its rally as an opportunity for a secondary offering, which would raise $1 billion (though the bankruptcy judge would have to approve such a deal). 

Take also the U.S. Global JETS ETF (JETS), which provides broad-based exposure to airline stocks. The fund went from $30 million in AUM in February to over $1 billion in June, making it one of the hottest ETFs on the market. Though it’s impossible to know who was doing that buying, the manager of the fund himself attributed it to “bored millennials.”

The market’s nearly 7% drop on June 11 halted this “buy the dip” trade, though it remains to be seen if this was the beginning of a real trend change for the bears or merely a short-term hiccup for the bulls. One thing is certain though—there are likely many newer traders who experienced real downside for the first time ever this week. Hopefully, they’ve used this to learn the importance of an exit plan. 

The authors hold no positions in any of the stocks mentioned. 

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