Retail investors won't just buy any dip — it has to be special

·Senior Writer
·2 min read

Retail investors have been very good about buying the dip in the past few years. As institutional and other non-retail players shrink in fear, regular folks with Fidelity and Robinhood and TD Ameritrade accounts pile money into the market.

It’s worked out well so far for them — with the S&P 500 scoring many all-time highs following the dips (see chart below). But recently retail investors have been less excited about dips.

Analysis from Vanda Research recently showed that for retail investors buying when stocks are lower, “the magnitude has been a little underwhelming relative to previous sell-offs.”

In a note from DataTrek, hedge fund veteran Nicholas Colas has an explanation as to why retail investors are behaving this way: it’s because retail investors have been desensitized to smaller sell-offs and are waiting for the big drops.

“Based on everything from Google search volume data related to popular interest in investing to Fidelity’s daily trade blotter is ‘yes, but only if it’s a big drop,’” Colas wrote.

How do you define a big drop? At least 5%.

“A grind lower won’t do it,” Colas said. Investors have seen a roller-coaster market since the pandemic began — for new investors, this would be their entire investing career — so a drop needs to be meaningful enough to make an impact. (The last time the S&P 500 dropped 5% was in October 2020.) Especially, since many retail investors have shown a hefty appetite for stocks with substantial volatility like GameStop, AMC, Hertz, and more.

Colas is a proponent of Google Trends as a barometer for new entrants in the market – how many people are signing up for brokerage accounts and starting to invest – something that has been borne out in the past two years. (Brokerages know this and pay $20 per click for sponsored links, he points out.) During that time, sell-offs coincided with big account openings as new investors jumped in to buy the dip. So far, September’s drop of around 2.1%, however, didn’t do much for people searching.

This hypothesis, of course, won’t be tested, until the next 5% or more drop.

Ethan Wolff-Mann is a writer at Yahoo Finance focusing on consumer issues, personal finance, retail, airlines, and more. Follow him on Twitter @ewolffmann.

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